IMF cuts 2023 growth outlook amid global shocks

WASHINGTON, Oct 11 (Reuters) – The International Monetary Fund on Tuesday cut its global growth forecast for 2023 amid conflicting pressures from the Ukraine war, higher energy and food prices, inflation and sharply higher interest rates. year.

The fund said its latest World Economic Outlook projections showed the global economy could shrink by a third by next year, marking a relaxed start to the IMF and World Bank annual meetings, the first in three years.

“The big three economies of the US, China and the euro area will continue to stagnate,” IMF chief economist Pierre-Olivier Gourinchas said in a statement. “In short, the worst is yet to come, and for many, 2023 will be a recession.”

The IMF said global GDP growth will slow to 2.7% next year, down from a forecast of 2.9% in July, as higher interest rates slow the US economy, gas prices rise in Europe and China continues to struggle with COVID-19 lockdowns and weakness. Property Department.

The fund kept its 2022 growth forecast at 3.2%, reflecting stronger-than-expected output in Europe but weaker performance in the US, after 6.0% global growth in 2021.

U.S. growth this year will be a meager 1.6% – a 0.7 percentage point reduction from July, reflecting an unexpected second-quarter GDP contraction. The IMF left its 2023 US growth forecast unchanged at 1.0%.

Eurozone growth will slow to 0.5% next year as some major economies, including Germany and Italy, enter a technical recession, the fund predicts, as higher energy prices dampen output. Gourinjas told a news conference that geopolitical changes in the continent’s energy supplies would be “broad and permanent,” keeping prices high for a long time.

Commenting on the market turmoil in Britain after financial markets condemned the proposed tax cuts, Gourinchas said UK fiscal policy must be in line with the central bank’s inflation targets.

Priority: Inflation

The IMF, in its view, said it would be subject to a delicate balancing act by central banks to fight inflation without too much tightening, which would push the global economy into an “unnecessarily severe recession” and cause disruptions to financial markets and pain to developing countries. But it rightly pointed out that controlling inflation was a major priority.

“The credibility of central banks could be undermined if they misjudge the stubborn persistence of inflation again,” Gourinchas said. “This could be very detrimental to future macroeconomic stability.”

The Treasury forecast that consumer price inflation rose to 9.5% in the third quarter of 2022 and eased to 4.7% in the fourth quarter of 2023.

A negative scenario

The IMF said a “combination of plausible shocks”, including a 30% increase in oil prices from current levels, would significantly darken the outlook, reducing global growth to 1.0% next year – a trend associated with broadly falling real incomes.

Other elements of this “downside scenario” include a sharp drop in Chinese property sector investment, emerging market currency depreciation and a sharp tightening of financial conditions as labor markets overheat.

The IMF said there was a 25% chance of global growth falling below 2% next year – a chance that has only happened five times since 1970 – and a greater than 10% chance of global GDP shrinking.

Dollar pressure

These shocks could keep inflation higher for longer, in turn putting upward pressure on the US dollar, now at its strongest level since the early 2000s. The IMF said this would put pressure on emerging markets and that further dollar strength could exacerbate debt crises for some countries.

But Gourinchas said the dollar’s strength is now a result of fundamental economic forces, including more aggressive monetary tightening in the United States than unruly markets.

Emerging market debt relief is expected to be a major topic of discussion among the world’s global financial policymakers at the Washington meetings, and Gourinchas said it was time for emerging markets to “bat down” to prepare for more difficult conditions. For most, the appropriate policy is to prioritize monetary policy toward price stability, allowing currencies to adjust, and “preserving valuable foreign exchange reserves when financial conditions actually deteriorate.”

Report by David Lauder; Editing by Andrea Ricci

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