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IMF cuts growth outlook, warns of global recession

WORLD WARNED International Monetary Fund (IMF) chief economist Pierre-Olivier Gourinchas speaks during an interview with Agence France-Presse at the IMF headquarters in Washington, D.C. on Tuesday, July 26, 2022 (July 27 in Manila). AFP PHOTO

WORLD WARNED International Monetary Fund (IMF) chief economist Pierre-Olivier Gourinchas speaks during an interview with Agence France-Presse at the IMF headquarters in Washington, D.C. on Tuesday, July 26, 2022 (July 27 in Manila). AFP PHOTO

WASHINGTON, D.C.: Surging inflation and severe slowdowns in the United States and China prompted the International Monetary Fund (IMF) on Tuesday (Wednesday in Manila) to downgrade its outlook for the global economy this year and the next while giving an even starker assessment of what may lie ahead.

“The outlook has darkened significantly since April,” IMF chief economist Pierre-Olivier Gourinchas said. “The world may soon be teetering on the edge of a global recession, only two years after the last one.”

“The world’s three largest economies — the United States, China and the euro area — are stalling with important consequences for the global outlook,” he told a briefing.

In its latest World Economic Outlook (WEO), the Washington, D.C.-based multilateral lender cut the 2022 global gross domestic product estimate to 3.2 percent, four-tenths of a point lower than the April forecast and about half the rate seen last year.

Last year’s “tentative recovery” from the coronavirus pandemic downturn “has been followed by increasingly gloomy developments in 2022 as risks began to materialize,” the report said.

“Several shocks have hit a world economy already weakened by the pandemic,” including the war in Ukraine, which has driven up global prices for food and energy, prompting central banks to raise interest rates sharply, the IMF said.

Ongoing Covid-19 lockdowns and a worsening real estate crisis have hindered economic activity in China, while the Federal Reserve’s (Fed) aggressive interest rate hikes are slowing US growth sharply.

But the bad news may not stop there, the IMF warned, saying “risks to the outlook are overwhelmingly tilted to the downside,” and if they materialize, could push the global economy into one of the worst slumps in the past half-century.

Key among concerns is the fallout from the Ukraine war, including the potential for Russia to cut off natural gas supplies to Europe, as well as a further spike in prices and the specter of famines due to the conflict’s chokehold on grain supplies.

In an ominous warning, the WEO said “such shocks could, if sufficiently severe, cause a combination of recession accompanied by high and rising inflation (‘stagflation’).”

That would slam the brakes on growth, slowing it to 2 percent in 2023. The global growth rate has only been slower five times since 1970.

Gourinchas said that would be “getting really close to a global recession.”

Inflation priority

The top priority for policymakers is to rein in soaring prices, even if it means pain for their citizens, the IMF said, since the damage caused by runaway inflation would be much worse.

In a blog post about the report, Gourinchas said the “synchronized” moves by major central banks to deal with the inflation threat “is historically unprecedented, and its effects are expected to bite.”

“Tighter monetary policy will inevitably have real economic costs, but delaying it [would] only exacerbate the hardship,” he added.

The IMF now sees consumer prices jumping 8.3 percent this year, nearly a full point higher than previously forecast, while emerging market economies face a 9.5-percent increase in consumer prices.

But, “further supply-related shocks to food and energy prices from the war in Ukraine could sharply increase headline inflation.”

That would increase the pain for poor nations least able to withstand the shock, where food makes up a larger share of family budgets.

US, China slowdowns

While the global economy did a bit better than expected in the first three months of the year, it appears to have “shrunk in the second quarter — the first contraction since 2020,” the IMF said.

The lender downgraded growth forecasts for most countries, including big revisions for the United States and China, cutting more than a point off the prior forecasts.

It now sees US growth this year of just 2.3 percent amid slowing consumer spending and rising interest rates, and the report said a recession — defined by two quarters of negative growth — might have already begun.

Gourinchas said the US had a “very narrow path” to avoid a downturn, and even a “small shock” could tip the economy into a recession.

China’s economy is expected to slow dramatically in 2022, expanding just 3.3 percent — the lowest in more than four decades with the exception of the 2020 coronavirus crisis — due to continuing Covid concerns and a “worsening” property crisis, the report said.

“The slowdown in China has global consequences: lockdowns added to global supply chain disruptions and the decline in domestic spending are reducing demand for goods and services from China’s trade partners,” it added.

There were some exceptions to the gloomy outlook, including upgrades for Italy, Brazil and Mexico, as well as for Russia, which is still expected to contract but is benefiting from rising oil prices due to Western sanctions, the WEO said.

Credit belongs to : www.manilatimes.net

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