IMF to slash 2023 global growth forecast again, says world could lose output the size of German economy

IMF Chief Kristalina Georgieva (Image: Reuters)

The International Monetary Fund (IMF) will next week slash its growth projection for 2023 for the second time on rising recession risks.

The IMF had in July cut its global growth projection for 2023 by 70 basis points to 2.9 percent and for 2022 by 40 basis to 3.2 percent.

“We will flag that the risks of recession are rising. We estimate that countries accounting for about one-third of the world economy will experience at least two consecutive quarters of contraction this or next year,” Managing Director Kristalina Georgieva said in an address at Georgetown University, Washington, DC, on October 6.

“And, even when growth is positive, it will feel like a recession because of shrinking real incomes and rising prices.”

Overall, the IMF expects a global output loss of about $4 trillion between now and 2026.

“This is the size of the German economy — a massive setback for the world economy. And it is more likely to get worse than to get better,” the managing director said.

While uncertainty remains extremely high in the context of war and the pandemic, the world could see more economic shocks, she said.

The rapid and disorderly repricing of assets could be amplified by pre-existing vulnerabilities, including high sovereign debt and concerns over liquidity in key segments of the financial market, Georgieva added.

Monetary, fiscal tightrope

Central banks and government must navigate the troubled waters carefully as the cost of a policy misstep can be enormous.

While not tightening enough would cause inflation to become de-anchored and entrenched, which would require future interest rates to be much higher and more sustained and cause massive harm to growth and massive harm to people, tightening monetary policy too much and too fast in a synchronised manner across countries could push many economies into prolonged recession, the IMF MD said.

“So far, higher interest rates are taking some of the heat out of domestic demand, including in housing markets. But inflation has remained stubbornly high and broad-based — which means that central banks have to continue to respond. In the current environment, this is the right thing to do: act decisively even as the economy inevitably slows.”

Both developed and emerging economies across the world have been raising interest rates to rein in inflation that has spiked to multi-decadal highs. Central banks across the globe undertook unprecedented monetary easing after the pandemic hit the world in 2020 even as supply-chain issues and intermittent lockdowns exacerbated price pressure.

Also read: Central bank monetary tightening encouraging, will prevent entrenched inflation, IMF says

This year, a commodity price surge following Russia’s invasion of Ukraine also raised costs for consumers and companies. Europe is facing a prolonged energy cost surge as Moscow has cut gas supplies.

For now, the next immediate priority should be to put in place a responsible fiscal policy that protects the vulnerable, without adding fuel to inflation, the IMF official said.

Governments should implement fiscal steps that are temporary and targeted with a sharp focus on lower-income households.

Meanwhile, where high energy prices are likely to persist, governments could provide direct help to low- and middle-income families while minimising the use of price controls, the IMF MD said.

Must support emerging markets

A stronger dollar, high borrowing costs and capital outflows are causing a triple blow to many emerging markets and developing economies, the IMF MD said.

“The probability of portfolio outflows from emerging markets over the next three quarters has risen to 40 percent. That could pose a major challenge to countries with large external financing needs,” she said.

The Federal Reserve’s sharp rate hikes have battered stocks and emerging market assets, including currencies.

While maintaining exchange rate flexibility will help, countries would also benefit from a more proactive approach and from taking precautionary steps before a crisis emerges, the official added.

More than a quarter of emerging economies have either defaulted or had bonds trading at distressed levels, and over 60 percent of low-income countries are at high risk of debt distress.

Thereby, “large creditors such as China and the private sector have a responsibility to act. The G-20 Common Framework is in place to support debt resolution for low-income countries. But this process must become faster and more predictable,” IMF’s Georgieva said.