IMF issues stark recession warning yet

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Image Source: ISS Africa

With a stern warning that “the worst is yet to come,” the IMF has again revised its projection for the world economy. For many people, 2023 “will feel like a recession,” the report states.

The organization forecasted on Tuesday that global growth will slow to 2.7% next year, with a 25% chance that it will fall below 2%. In comparison, this year’s predicted growth is 3.2%.

Due to the war in Ukraine being fought by Russia, high inflation, and a downturn in China, the projection for next year is 0.2 percentage points lower than the IMF’s July outlook.

According to Pierre-Olivier Gourinchas, the IMF’s top economist, more than one-third of the world’s economies will experience declines this year or the following year, while the three biggest economies—the United States, the European Union, and China—will continue to stagnate.

According to the IMF, the 2008 financial crisis and the worst stage of the coronavirus epidemic were the two lowest economic outlooks since 2001. Since 1970, the global growth rate has only dropped below 2% five times.

Despite central banks’ efforts to reduce it, the IMF predicts that global inflation will peak late this year but “stay elevated for longer than previously predicted.”

Global inflation is anticipated to increase from 4.7% in 2021 to 8.8% by the year’s end. After that, it is anticipated to return to 6.5% in 2023 and 4.1% in 2024.

Major central banks have been raising interest rates to keep price increases under control and aim for inflation near 2%. But the effort is also increasing economic hazards.

A global recession might be made worse if they push too hard, and if they back off, inflation, which the IMF dubbed “the most immediate threat to current and future prosperity,” could take hold.

According to Gourinchas, the pace of tightening has sped up as central banks worldwide are now laser-focused on restoring price stability. However, there are dangers associated with both under and over-tightening.

This week, the United Nations Conference on Trade Development issued a warning that tighter monetary policy would cause more global harm than combined the 2008 financial crisis and the Covid-19 shock in 2020.

Despite being necessary, increased interest rates, according to the IMF, are causing instability, especially in emerging nations with heavy debt loads.

Some substantial downgrades for major economies were mentioned in the most recent predictions. For example, it is predicted that the US will increase by just 1.6% this year and only 1% in 2023.

China’s growth is expected to be lower, at 3.2% in 2022 and 4.4% in 2023. The IMF highlighted the lingering consequences of measures taken to stop the coronavirus from spreading and the quick decline of the property industry, which it claimed is responsible for nearly one-fifth of the nation’s economic activity.

The IMF stated that this would significantly impact global trade and activity, given the size of China’s economy and its significance for global supply chains.

Why the IMF may have predicted a recession correctly

Markets worldwide are flashing warning signs that the world economy is close to collapse, a recession is now a matter of when not if.

The pulse of those red lights has increased over the past week as markets have struggled to accept the certainty that the Federal Reserve will keep up with its most aggressive monetary tightening campaign in decades to squeeze inflation out of the US economy, even if doing so results in a recession. And even if it comes at the expense of clients and companies outside the US.

Read Also: IMF criticizes UK government’s tax plans 

According to research firm Ned Davis, there is currently a 98% risk of a worldwide recession, which adds some somber historical legitimacy to the discussion. Only twice in 2008 and 2020 was the recession likelihood reading for the company this high.