The International Monetary Fund has told central banks to “stay the course” in their fight against inflation, despite warning that a third of the global economy will be in recession next year.
In its biannual update, the Washington-based IMF said “the worst is yet to come”. He cited a combination of cost of living pressures, Russia’s invasion of Ukraine and a slowdown in China as important factors behind further deterioration in growth.
IMF economic adviser Pierre-Olivier Gourinchas said storm clouds were gathering, but insisted central banks must maintain their “laser focus” to defeat inflation or risk the need for even tougher action later if upward price pressures become entrenched.
Gourinchas said the IMF, like central banks, underestimated the strength of inflationary pressures when they first emerged in 2021, but said there had since been a “rapid and synchronized tightening of monetary conditions, along with a strong appreciation of the US dollar against most other currencies”.
The US, EU and UK reported inflation at levels not seen since the early 1980s and Gourinchas said price pressures were proving “quite stubborn”.
He added: “The risk of miscalibration of monetary, fiscal or financial policies has risen sharply at a time when the global economy remains historically fragile and financial markets show signs of strain.”
The US central bank, the Federal Reserve, raised interest rates by 0.75 points in its last three meetings, while the Bank of England raised its borrowing costs by 0.1% to 2, 25% since last December.
Gourinchas said the danger of doing too little outweighed the cost of doing too much, but said central banks still needed to be careful. “Excessive tightening risks plunging the global economy into an unnecessarily severe recession,” he said.
The IMF’s six-month World Economic Outlook (WEO) estimated that global growth will slow from 6% in 2021 to 3.2% this year and 2.7% in 2023. The forecast for 2022 is 0 lower, 4 percentage point to that of six months ago, but unchanged on an updated forecast basis made in July.
For 2023, growth has been revised downwards by 0.9 points since April and by 0.2 points since July. The outlook for 2023 is weaker for 143 countries – accounting for 92% of global output – than it was six months ago.
More than a third of the global economy will contract in 2023, while the three largest economies – the US, EU and China – will continue to stagnate,” Gourinchas said in the foreword to the WEO. “In short, the worst is yet to come, and for many people, 2023 will look like a recession.”
Russia’s invasion of Ukraine continues to destabilize the global economy, Gourinchas added. “Beyond the increasing and senseless destruction of lives and livelihoods, this has led to a severe energy crisis in Europe which is sharply increasing the cost of living and hampering economic activity,” he said. .
Germany and Italy, both heavily dependent on Russian energy, are expected to experience economic contraction next year of 0.3 and 0.2 points respectively, while France is expected to post growth of 0.7%.
Among the other G7 countries, Japan is expected to show the strongest growth (1.6%), followed by Canada (1.5%) and the United States (1%). The UK is expected to grow by 0.3%. China, hit by tight Covid lockdown restrictions and a weakening property market, is expected to more than halve its growth rate from 8.1% in 2021 to 3.2% this year, before recovering to 4.4% in 2023.