The International Monetary Fund (IMF) lowered its forecasts for world growth and raised its inflation forecasts, warning that the outlook for economic risks “is heavily tilted to the downside”.
The new projections, released on Tuesday (26), come at a time when the planet is trying to deal with the aftermath of Russia’s invasion of Ukraine, prolonged disruptions caused by the pandemic and a rapid tightening of financial conditions, while banks centrals run to try to contain the price surge.
The Fund now expects global GDP (Gross Domestic Product) growth to slow to 3.2% in 2022, down 0.4 percentage points from its April estimate and about half the pace of expansion last year. In 2023, the projection is that world growth will be even weaker, 2.9%. Three months ago, the estimate for next year was 0.7 percentage points higher.
Global inflation is expected to intensify, and the IMF raised its forecast for this year and next year by almost a percentage point to 8.3% and 5.7%, respectively.
The multilateral lending institution said the economic outlook had become much bleaker and “extraordinarily uncertain”, with inflation reaching historic highs and challenges to world growth becoming ever greater.
Pierre-Olivier Gourinchas, the IMF’s chief economist, warned in an interview that the environment will test the “grit” of central banks around the world in their determination to raise interest rates to restore price stability even amid a downturn in the economy.
“We are going through a very critical moment,” he said. “It’s easy to cool down the economy when it’s too hot. But it’s much harder to reduce inflation when the economy is close to a recession.”
The risk of a recession is “especially prominent” in 2023, because next year’s growth is expected to fall to its lowest point in several countries, savings accumulated during the pandemic will have shrunk and “even small shocks could be enough to cause a economic crisis”.
A “plausible” scenario that the Fund has mapped is a sharp reduction in Russian energy exports, which could include the complete suspension of natural gas deliveries from Russia to Europe, something that would further dampen growth and trigger further price pressures. .
But Gourinchas did not go so far as to define the emerging economic environment as “stagflationary,” as it did in the 1970s, maintaining that central banks now have much more credibility than they did then. He said, however, that “the risk that we will have a global recession has grown, and inflation will be more persistent than we anticipated.”
The factors that justified the worsened growth projections involve deterioration in most of the planet’s major economies.
Hampered by severe Covid-19-related lockdowns, China’s economy is expected to expand by just 3.3% this year, 1.1 percentage points less than expected in April, and its economic growth is expected to be the lowest recorded for the year. country in four decades, except for the year 2020, which registered the shock of the pandemic.
For the United States, last year’s 5.7% expansion is expected to less than halve to 2.3% in 2022 and continue to fall next year to just 1% as the soaring Inflation is reducing the ability of households to purchase goods and services, consumption is in retreat and the monetary tightening campaign of the Fed (Federal Reserve), the central bank of the United States, very aggressive in historical terms, is starting to have an effect.
Compared to April’s projections, all of the new estimates show numbers at least one percentage point lower.
Taking inflation into account, “real” growth in US GDP should be just 0.6% in annualized terms in the fourth quarter of 2023. “In that case, it wouldn’t take much to launch the economy into what we could define as a technical recession”, said Gourinchas.
He added that emerging markets had become a major concern as the Fed’s tightening cycle raises funding costs around the world. While no “disorderly” conditions have arisen in the world’s financial markets so far, the big question is how much additional pressure economies are able to withstand.
Emerging markets should feel even more pressure if the alternative scenario proposed by the IMF, of a sharp drop in exports of oil and natural gas from Russia, comes to fruition, with a reinforcement of inflationary expectations and central banks forced to adopt a even more severe monetary tightening.
Under these circumstances, world growth would fall to 2.6% in 2022 and 2.2% in 2023. According to the IMF, world growth has only been below 2% five times since the 1970s.
Europe, which already anticipated much lower growth this year than initially anticipated, would also be disproportionately affected. The IMF had already reduced its forecast to growth of 2.6% in 2022 and 1.2% in 2023, and the assessment for Germany was substantially reduced from the April forecast. Next year, the German economy is expected to grow by just 0.8%.
A cessation of Russian natural gas exports could reduce European growth by a further 1.3 percentage points in 2023, which would result in “almost zero regional growth”.
That would likely create more problems for the European Central Bank, which already faces challenges in, for example, figuring out how to raise interest rates without causing a new eurozone debt crisis.
Gourinchas said a new bond-buying instrument announced by the ECB last week could have “a very strong calming effect” on markets, but said putting it into operation would be “a delicate exercise.”
Translation by Paulo Migliacci
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