US: A worsening energy crisis in Europe would severely harm growth and raise inflation, while prolonged high inflation could prompt larger-than-anticipated policy interest hikes and further tightening of global financial conditions.
The global economic outlook is even gloomier than projected last month, the International Monetary Fund said on Sunday, citing a steady worsening in purchasing manager surveys in recent months.
It blamed the darker outlook on tightening monetary policy triggered by persistently high and broad-based inflation, weak growth momentum in China, and ongoing supply disruptions and food insecurity caused by Russia’s invasion of Ukraine.
The global lender last month cut its global growth forecast for 2023 to 2.7% from a previous forecast of 2.9%.
In a blog prepared for a summit of G20 leaders in Indonesia, the IMF said recent high-frequency indicators "confirm that the outlook is gloomier," particularly in Europe.
It said recent purchasing manager indices that gauge manufacturing and services activity signalled weakness in most Group of 20 major economies, with economic activity set to contract while inflation remained stubbornly high.
"Readings for a growing share of G20 countries have fallen from expansionary territory earlier this year to levels that signal contraction," the IMF said, adding that global fragmentation added to "a confluence of downside risks."
"The challenges that the global economy is facing are immense and weakening economic indicators point to further challenges ahead," the IMF said, adding that the current policy environment was "unusually uncertain."
A worsening energy crisis in Europe would severely harm growth and raise inflation, while prolonged high inflation could prompt larger-than-anticipated policy interest hikes and further tightening of global financial conditions.
That in turn posed "increasing risks of a sovereign debt crisis for vulnerable economies," the IMF said.
Increasingly severe weather events would also harm growth across the globe, it said.
The International Monetary Fund said in a report in October stated that the world economy was headed for “stormy waters” as it downgraded its global growth projections for next year and warned of a harsh worldwide recession if policymakers mishandled the fight against inflation.
The grim assessment was detailed in the fund’s closely watched World Economic Outlook report, which was published as the world’s top economic officials travelled to Washington for the annual meetings of the World Bank and the I.M.F.
The gathering arrives at a fraught time, as persistent supply chain disruptions and Russia’s war in Ukraine have led to a surge in energy and food prices over the last year, forcing central bankers to raise interest rates sharply to cool off their economies. Raising borrowing costs will probably tame inflation by slowing business investment and consumer spending, but higher rates could also yield a new set of problems: a cascade of recessions in rich nations and debt crises in poor ones.
There are growing fears among policymakers that a so-called soft landing will elude the global economy.
“In short, the worst is yet to come, and for many people 2023 will feel like a recession,” the International Monetary Fund report said.
The organization maintained its most recent forecast that the global economy will grow 3.2 percent this year but now projects that will slow to 2.7 percent in 2023, slightly lower than the fund’s previous estimate.
Both figures are big comedowns from the start of the year, when the fund projected global growth of 4.4 percent in 2022 and 3.8 percent in 2023, highlighting how the outlook has darkened in recent months.
Inflation is expected to peak later this year and decline to 6.5 percent in 2023 from 8.8 percent in 2022.
“The risks are accumulating,” Pierre-Olivier Gourinchas, the International Monetary Fund’s chief economist, said during an interview in which he described the global economy as weakening. “We’re expecting about a third of the global economy to be in a technical recession.”
The fund defines a “technical recession” as an economy that contracts for two consecutive quarters.
Corporate America and Wall Street are already bracing for a downturn. Jamie Dimon, the chief executive of JPMorgan Chase, told CNBC on Monday that the United States was likely to be “in some kind of recession six to nine months from now.”
Despite the dire tone of the International Monetary Fund’s forecasts, some private forecasters are predicting worse. The median economist in a Bloomberg survey expects 2.9 percent global growth this year and 2.5 percent next, as the euro area posts 0.2 percent growth in 2023 and Eastern Europe sees output fall.
The I.M.F. report detailed how the economies of the United States, China and the 19 nations that use the euro are in various states of slowing, with effects rippling around the world.
In the United States, inflation and rising interest rates are sapping consumer spending power, and housing activity is slowing as mortgage rates rise. A recent three-month dip in gasoline prices gave consumers some relief from inflation, but prices have started to rise again. There are concerns that trend could continue after the oil production cut announced last week by the international cartel known as OPEC Plus.
The fund forecast that the U.S. economy would grow 1.6 percent this year, a downgrade from its previous projection, and 1 percent in 2023.
China's economy is projected to grow 3.2 percent this year after expanding 8.1 percent in 2021.
Europe has been heavily reliant on Russia for energy and is facing sharp increases in oil and gas prices as additional sanctions go into effect later this year, just as the weather turns colder.
Tourism has buttressed many of the economies of Europe in 2022, but uncertainty about energy prices has slowed manufacturing activity.
Efforts to respond to inflation have led to policy proposals that have caused their own upheaval. Britain’s financial markets have faced turmoil after investors rebuffed the tax and spending policies of Prime Minister Liz Truss and her new government. The Bank of England stepped up its intervention in Britain’s bond market on Tuesday, the second expansion of its emergency measures in two days, as it warned of a “material risk” to the nation’s financial stability.
Russia's economy is holding up better than previously projected even in the face of robust international sanctions. Russia’s economy is expected to contract 3.4 percent this year and 2.3 percent in 2023, much less than many economists believed earlier in the year.
International Monetary Fund officials attributed that to the resilience of its energy exports, which have allowed Russia to stimulate its economy and prop up its labor market. Still, Russia is facing a deep recession, and its economic output is far lower than before the war.
The impact of Russia’s invasion of Ukraine was top of mind as policymakers gathered in Washington.
Russia’s Finance Minister Anton Siluanov attended the meeting virtually. US Treasury Secretary Yellen called on the Group of 20, which represents the world’s major economies, to step up financial assistance to nations facing food shortages and said she would support a freeze on debt repayment for countries that needed it.
The slowdowns in advanced economies are putting pressure on emerging markets, many of which were already fragile and facing high debt burdens as they recovered from the pandemic. Higher interest rates, soaring food costs and diminished demand for exports threaten to push millions of people into poverty. And low vaccination rates in places such as Africa mean that the health effects of the pandemic are persistent.
“The poor are hurt the most,” David Malpass, the president of the World Bank, told reporters before this week’s meetings. “We’re in the midst of a crisis-facing development.”
The rapid appreciation of the U.S. dollar, which is the strongest it has been since the early 2000s, also represents a threat to emerging markets. The International Monetary Fund urged policymakers in those countries to “batten down the hatches” and conserve their reserves of foreign currencies for when financial conditions worsen.
As the pain piles up in rich and poor countries alike, policymakers are under increasing pressure to blunt the fallout, with central bankers — including those at the Federal Reserve — facing calls to curtail interest rate increases.
Still, the fund warned that doing too little to combat inflation would make the fight more costly later. It also said governments should avoid enacting fiscal policies that would make inflation worse.
In its report, the fund acknowledged that its forecasts faced considerable uncertainty.
The further withdrawal of Russian gas supplies to Europe could depress the continent’s economies, debt crises in developing countries could worsen, and the pandemic could come roaring back.
“Risks to the outlook remain unusually large and to the downside,” the report said.
- THE HINDUSTAN TIMES, THE NEW YORK TIMES
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