WASHINGTON: Surging inflation and severe slowdowns in the United States and China prompted the IMF to downgrade its outlook for the global economy this year and next, while warning Tuesday that the situation could get much worse.
“The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one,” IMF chief economist Pierre-Olivier Gourinchas said.
In its latest World Economic Outlook, the International Monetary Fund cut the 2022 global GDP 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 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 aggressive interest rate hikes are slowing US growth sharply.
But the IMF offered a stark caveat to the forecasts, cautioning that “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 the concerns is the fallout from the war in Ukraine including the potential for Russia to cut off natural gas supplies to Europe, as well as a further spike in prices and a food shortage due to the chokehold the war has on grain supplies that could trigger famine.
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 2.0 percent in 2023. The global growth rate has only been slower five times since 1970, the IMF said.
2023 is diffiult.
According to the IMF’s estimate, major shocks may result in “stagflation,” which is a combination of high inflation and a recession.
Declining economic growth in the US and China could create uncertainty and anxiety in financial markets. Investors may be concerned about the economic outlook and may adjust their investment strategies, causing volatility and instability in global financial markets.