The International Monetary Fund (IMF) has cut its global growth forecast to 3.2% amid high inflation and the war in Ukraine, and warned the world could be “teetering on the edge of global recession.”
In an update to its global growth forecast, the International Monetary Fund (IMF) warned of risks to the global economy, which if left unchecked, could push the world into a recession.
High inflation and the risks posed by Russia’s invasion of Ukraine are responsible for placing the global economy in peril, the IMF said, adding that “worst case” scenarios are possible.
In a statement, 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.”
Gourinchas added that the the current environment suggests that the “likelihood that the US economy can avoid a recession” is “quite narrow.”
What is the IMF forecasting?
GDP growth worldwide will slow to 3.2% in 2022. The new estimate comes after the IMF had foreseen 3.6% growth. April of this year.
“The outlook has darkened significantly since April,” Gourinchas said.
“The world’s three largest economies, the United States, China and the euro area are stalling with important consequences for the global outlook,” he added.
The update added that that global GDP contracted in the second quarter due to downturns in China and Russia.
China’s economy, battered by COVID-19 lockdowns and a real estate-driven debt crisis, is expected to grow at 3.3%, down 1.1 percentage points from previous estimates.
The IMF also cut growth forecasts for 2023 of 3.6% announced in April, to 2.9%.
Growth worldwide had rebounded last year to 6.1% after the COVID-19 pandemic crushed output globally in 2020.
IMF forecast ‘extraordinarily uncertain’
In its latest prognosis, the IMF said its forecast was “extraordinarily uncertain.” Russia’s invasion of Ukraine has sent energy and food costs soaring, destabilizing economies and households around the globe.
Further monetary tightening may be needed as prices soar and people’s lives are thrown into turmoil. In advanced economies, inflation is expected to level off at 6.6%, although the US and Germany have already recorded higher monthly year-on-year rates.
One “plausible” worst-case scenario involves a total cut off of Russian energy to Europe with an additional 30% drop in Russian energy exports. That could slow growth to 2.6% this year and 2% next year.
In such a case, growth would hover around zero in Europe and the US. Only five times since 1970, including during the pandemic, has growth globally dropped below 2%.
Inflation in developing economies could top out over 9%, though again many developing nations have hit this mark and seen rates that rise way above it.
By contrast, the Russian economy has contracted 6% already this year as Western sanctions take a formidable bite out of the local economy, though next year contraction is currently predicted to be 3.5%.
Is there an alternative?
The IMF official stated that under the aforementioned situation, the US and the Eurozone are likely to experience “near zero growth” next year. The knock-off effects will be faced by the world, he said, adding that the economic experts are focused on seeking ways to combat inflation, further urging policymakers to hold its top priority. ‘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. He insisted raising interest rates, flagging that although tighter policies will lead to “real economic costs, delaying will only exacerbate hardships.”
