The International Monetary Fund has said the global economy could soon be teetering on the brink of recession amid evidence that the world’s three biggest economies are all stalling and inflation is higher than previously forecast.

In a downbeat update to its April world economic outlook (WEO), the IMF cut its growth forecasts in 2022 and 2023 – and raised the prospect of a more pronounced slowdown.

It said problems in the US, China and the eurozone had resulted in global output falling in the second quarter of this year – the first contraction since the start of the Covid-19 pandemic.

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

The Washington-based IMF said it now expected the global economy to grow by 3.2% in 2022 – a 0.4-point reduction since April. The slowdown is predicted to continue next year, when growth is now forecast to be 2.9% – 0.7 points lower than had been pencilled in three months ago.

The UK is forecast to grow by 3.2% in 2022 and by just 0.5% in 2023 – cuts of 0.5 and 0.7 points. The IMF expects the UK to slow down markedly in the second half of this year and to be the weakest of the G7 economies in 2023.

“The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook,” Gourinchas said.

“Higher than expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions. China’s slowdown has been worse than anticipated amid Covid-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine.”

The IMF said that by the fourth quarter of 2022 it was forecasting global inflation of 8.3%, up from its April estimate of 6.9%. It identified the UK – where inflation is now on course to be 2.7 points higher at 10.5% – and the eurozone (up 2.9 points to 7.3%) as places where cost of living pressures had particularly intensified.

A breakdown of the revised WEO forecasts showed growth downgrades in 2022 of 0.8 points in the US, 0.9 points in Germany and 1.1 points for China. In 2023, all the world’s major economies apart from Nigeria and Saudi Arabia – both oil exporting countries – are now expected to grow more slowly.

Only Japan and Canada of the group of major industrial nations are forecast to grow by more than 1% next year, with the IMF predicting expansion of 1% in the US and France, 0.8% in Germany and 0.7% in Italy.

Gourinchas said there were a number of downside risks to the global economy that could result in an even weaker performance. These included:

  • A sudden stop of European gas flows from Russia as a result of the war in Ukraine.
  • Stubbornly high inflation.
  • A debt crisis triggered by tighter global financial conditions.
  • Further Covid-19 outbreaks and lockdowns in China.
  • Social unrest triggered by rising food and energy prices.
  • Trade wars and geopolitical fragmentation.

“In a plausible alternative scenario where some of these risks materialise, including a full shutdown of Russian gas flows to Europe, inflation will rise and global growth decelerate further to about 2.6% this year and 2% next year – a pace that growth has fallen below just five times since 1970,” Gourinchas said.

“Under this scenario, both the United States and the euro area experience near zero growth next year, with negative knock-on effects for the rest of the world.”

The IMF’s economic counsellor said combatting inflation should be the top priority for policymakers, and he supported recent central bank decisions to raise interest rates.

“Tighter monetary policy will inevitably have real economic costs, but delaying it will only exacerbate the hardship. Central banks that have started tightening should stay the course until inflation is tamed,” he said.

Governments could cushion the impact of the slowdown on the most vulnerable through targeted support, Gourinchas said, but the help should be paid for by higher taxes or lower public spending to ensure the job of central banks was not made harder.

Source: The Guardian