The IMF stated Tuesday that global growth will drop further next year as countries deal with the consequences of Russia’s invasion of Ukraine, soaring costs of living, and economic downturns.
Following the coronavirus epidemic, the world economy has been struck by multiple blows, with the war in Ukraine driving up food and energy prices, while skyrocketing costs and rising interest rates threaten to echo around the world.
“This year’s shocks will re-open economic scars that were only partially healed post-pandemic,” said Pierre-Olivier Gourinchas, economic counselor at the International Monetary Fund, in a blog post accompanying the fund’s latest World Economic Outlook.
More than a third of the global economy will contract this year or next, and the world’s three largest economies — the United States, the European Union, and China — will remain stagnant, he predicted.
“The worst is still to come,” warned Gourinchas, “and for many people, 2023 will seem like a recession.”. In its report, the IMF reduced its global GDP prediction for 2023 to 2.7 percent, 0.2 points lower than in July. It maintains its 3.2 percent global growth prediction for this year.
According to the IMF, the global growth profile is at its “weakest” since 2001, with the exception of the global financial crisis and the worst of the epidemic. This reflects global economic slowdowns, such as a US GDP drop in the first half of 2022 and viral lockdowns in China on top of a property market crisis.
Laser focusing
A crucial reason driving the slowdown is a shift in policy as central banks attempt to rein in skyrocketing inflation, with higher interest rates beginning to cool domestic demand. According to Gourinchas in the paper, the most urgent threat to prosperity is rising price pressures, and central banks are now “laser-focused on restoring price stability.”
Global inflation is predicted to peak this year at 9.5 percent before falling to 4.1 percent by 2024. However, he warned that misjudging the permanence of inflation could be detrimental to future macroeconomic stability by “gravely eroding the hard-won confidence of central banks.”.
While current issues do not preclude a large slump, the fund cautioned that many low-income nations are either in or near debt distress. To avoid a wave of national debt crises, progress toward debt restructuring for the most vulnerable is required. “Time may be running out,” Gourinchas warned.
US economic slowdown
The IMF has also reduced its predictions for the world’s two largest economies, the United States and China. Due to an unexpected decline this year, US economic growth is estimated to be 1.6 percent this year, 0.7 points lower than the fund’s July forecast.
“Declining real disposable income continues to eat into consumer demand, and increasing interest rates are exerting a significant toll on spending,” according to the IMF.
The Federal Reserve has been rapidly raising interest rates to combat rising inflation, which is hampering economic activity. Furthermore, the central bank has stated that additional rises are likely. According to the IMF, the Eurozone’s slowdown will worsen next year, and China’s GDP will be the slowest in decades – save during the original coronavirus outbreak.
China’s GDP is likely to grow at 3.2 percent this year, which is slightly lower than previously predicted. The fund warned that the deterioration of China’s property sector recession could bleed over into the local banking sector, putting a damper on GDP.
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