Global growth stalls with US-China war and slowdown, says IMF

The persistence of the Ukrainian War and its direct consequences, such as the energy crisis, the increase in the cost of living and the slowdown of the world’s largest economies, should hold back global growth until next year, according to a report by the International Monetary Fund published on Tuesday. thursday (11).

The IMF forecast is that the world will grow an average of 3.2% this year and 2.7% next year – a cut of 0.2 point from the last forecast made by the body, with a chance of growth falling short. of 2% in 2023.

French economist Pierre-Olivier Gourinchas, economic adviser to the IMF, sums it up: “In short, the worst is yet to come, and for many people 2023 will look like a recession.” According to the report, a third of countries are expected to see their economies contract this year or next, amid steadily rising prices and shrinking household incomes.

Among the main causes of the global slowdown are the faltering economies of the United States, China and the European Union, the fund points out.

In the US, interest rate hikes to contain accelerating inflation (which is expected to end 2022 at 8.1% in the annual index, the fund predicts) should hold GDP growth to 1% next year, according to the report.

China, meanwhile, is expected to grow 3.2% this year and 4.4% in 2023, far below pre-pandemic levels seen before 2020, amid a weakening real estate sector, which accounts for a fifth of Chinese economic activity, and to the continuity of the lockdown policy to contain the virus, points out the fund.

Eurozone countries, in turn, should have the lowest growth among developed nations, with only 0.5% growth in the bloc’s GDP in 2023, according to the IMF, and its main cause is the energy crisis – the World War. in Ukraine caused the price of gas to quadruple in Europe, with the reduction of supply by Russia.

“The Russian invasion of Ukraine continues to powerfully destabilize the global economy. In addition to the escalating and senseless destruction of lives and communities, it has led to a severe energy crisis in Europe and is dramatically increasing the cost of living and making it difficult to economic activity”, according to Gourinchas.

The war has also put pressure on food prices around the world, with the difficulty of exporting grains, affecting mainly low-income countries. Inflation is more widespread than previous projections, says the agency, but the good news is that it should reach a peak this year, with 9.5% in the year, before starting to slow down to a level of 4.1% in 2024, projects the IMF.

Rampant price increases are the most immediate threat to the global economy, squeezing income and undermining macroeconomic stability, but central bank action must be carefully calculated, the report notes.

Softer action can push inflation further, eroding central banks’ credibility and raising inflation expectations. A more aggressive action than necessary, with an exaggerated increase in interest rates, for example, pushes economies into an unnecessarily severe recession, according to the IMF, which ends up also affecting financial markets.

“Where necessary, financial policies should ensure that markets remain stable, but the world’s central banks need to have a firm hand with monetary policy heavily focused on controlling inflation,” the report reads.

It must be borne in mind that the energy crisis, especially in Europe, is not temporary, points out the IMF, and the realignment of energy chains for geopolitical reasons is permanent. This becomes more important now in the northern hemisphere, with the arrival of winter, which must be challenging. The IMF points out that price signaling is essential to reduce demand and stimulate energy supply, but that price controls, with unfocused subsidies and export bans, must be costly in fiscal terms and can lead to an excess. of demand, drop in supply and rationing.

According to the IMF, fiscal policies can help economies adapt to a more volatile environment by investing in productive capacity, human capital, process digitization, green energy and supply chain diversification. Investments in these areas “can make economies more resilient for when the next crisis hits”, says the agency.

Another global challenge is the significant strengthening of the dollar, especially for emerging markets, with the US currency at its highest level since the early 2000s, which contributes to rising prices in low-income countries. The IMF points out that an appropriate response is to maintain price stability by allowing exchange rates to fluctuate and holding foreign reserves for when conditions worsen further.

According to the fund, the juxtaposition of the energy crisis, the food crisis and the extreme temperatures recorded in the northern hemisphere summer show how it is necessary to invest in policies to avoid climate catastrophe. “The costs go up dramatically the longer we delay the green transition. The message is clear: a timely and credible transition is not only critical to the future of the planet, it also contributes to macroeconomic stability.”

The report comes amid the annual meetings of the International Monetary Fund and the World Bank, which take place throughout the week in the US capital, Washington, with politicians and economists from around the world. It is the first time that meetings have taken place completely in person since 2020, with the outbreak of the Covid-19 pandemic.