The worst for the global economy is yet to come, the International Monetary Fund's (IMF) top economist Pierre-Olivier Gourinchas has warned.
"…this year's shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession," Gourinchas wrote in an article accompanying the October 11 release of an update to the IMF's World Economic Outlook report.
In its World Economic Outlook update, the IMF retained its GDP growth forecast of 3.2 percent for 2022 but lowered that for 2023 by 20 basis points to 2.7 percent.
Source: IMF
According to Gourinchas, the growth slowdown in 2023 would be "broad-based", with countries making up about 33 percent of the global economy set to shrink either in 2022 or 2023.
"We estimate that there is about a one in four probability that global growth next year could fall below the historically low level of 2 percent. If many of the risks materialise, global growth would decline to 1 percent with quasi stagnant income-per-capita in 2023. According to our calculations, the likelihood of such an adverse outcome, or worse, is 10 percent to 15 percent," Gourinchas said.
Global inflation is seen peaking at 9.5 percent in 2022 before cooling to 4.1 percent by 2024.
Also read: IMF cuts India's FY23 growth forecast by 60 bps to 6.8%
Dollar versus the rest
Persistent and elevated inflation has forced central banks around the world to tighten monetary policies rapidly, with the US Federal Reserve raising interest rates by 300 basis points so far in 2022.
One basis point is one-hundredth of a percentage point.
As per CME's FedWatch Tool, there is more than an 80 percent chance the US Fed will increase the federal funds rate target range by 75 basis points at the conclusion of its next monetary policy meeting on November 2, with it being near certain that the interest rates will end 2022 higher than 4 percent.
The rapid tightening of the American monetary policy has helped the greenback post the biggest annual gain in almost 20 years, putting other currencies under severe pressure.
The Indian rupee, for instance, crossed the 80-per-dollar for the first time in July and has been sliding to new lows in recent days. The rapid depreciation of the rupee—nearly 10 percent so far in 2022—has come despite the Reserve Bank of India (RBI) deploying its huge foreign exchange reserves in the currency's defence.
As per the latest data, India's foreign exchange reserves stood at $532.66 billion on September 30, down more than $100 billion from their peak of $642.45 billion on September 3, 2021.
Gourinchas, though, called for exchange rate adjustments and to conserve foreign exchange reserves "for when financial conditions really worsen".
Source: IMF
According to the IMF's top economist, the dollar's rise, so far, has been primarily due to fundamental factors.
"As the global economy is headed for stormy waters, now is the time for emerging market policymakers to batten down the hatches," he added.
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