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Topline
The International Monetary Fund on Tuesday downgraded its forecast for the global economy next year and warned inflation will be worse than previously expected due largely to the ongoing disruptions spurred by the war on Ukraine—highlighting the difficulties faced by central banks around the world as they try to cool decades-high price increases without spurring a recession.
International Monetary Fund Managing Director Kristalina Georgieva speaks during an event at the … [+] World Bank.
AFP via Getty Images
Key Facts
In its biannual World Economic Outlook report published Tuesday, the IMF said global growth is expected to fall from 6% in 2021 to 3.2% this year and 2.7% in 2023—0.2 percentage points lower than its forecast just three months ago.
The organization blamed the lagging growth prospects on the Russian invasion of Ukraine, persistent and broadening inflation pressures and the slowdown in China exacerbated by stringent Covid-19 measures.
Fueling the overall decline, the IMF downgraded its U.S. economic growth forecast to 1% as a result of the Fed’s ongoing interest rate hikes, but noted the slowdown could be “most pronounced” in Europe, where an energy crisis spurred by the war on Ukraine will continue to take a “heavy toll” into next year.
“In short, the worst is yet to come,” the IMF’s Pierre-Olivier Gourinchas said of the data, noting that a third of the world economy will likely contract this year or next and that “for many people, 2023 will feel like a recession.”
The organization said it expects global inflation will peak at 9.5% later this year before falling to 4.1% by 2024—still significantly higher than 3.4% last year—but it also emphasized the risk of central banks raising rates too much and pushing the global economy into an “unnecessarily severe recession.”
Overall, there’s a one-in-four chance that global growth could fall below the historically low level of 2%, the IMF estimates, but the chances of growth falling to near-zero—or worse—next year remain notable, at about 10% to 15%.
Key Background
Skyrocketing inflation has forced central banks around the world to reverse pandemic-era policy measures meant to bolster markets—but prices haven’t stopped spiking, and more economists are worrying officials may fuel a recession while trying to cool the economy. This summer, Bank of America economists warned clients that prolonged inflation and the resulting interest rate hikes have unleashed a “worrying deterioration” in the economy, and particularly in the once-booming housing market. “The Fed has become more committed to using its tools to help restore price stability, with a willingness to accept at least some pain in the process,” they said.
Tangent
The Fed’s aggressive policy has already tanked the housing and stock markets. New home sales plunged to a six-year low this summer, and the stock market has shed about 25% of its value this year—reversing nearly two years of gains. Analysts warn the fallout will only get worse if the nation plunges into a recession.
Further Reading
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