IMF cuts 2023 growth forecast and warns 'worst is yet to come'

A third of the world economy is expected to shrink this year or the next as incomes shrink and prices rise

Pierre-Olivier Gourinchas, IMF chief economist, said 'for many people 2023 will feel like a recession'. AFP

The International Monetary Fund has cut its growth forecast for 2023 and warned of a cost of living crisis as the global economy continues to be affected by the war in Ukraine, broadening inflation pressures and a slowdown in China.

The fund maintained its global economic estimate for this year at 3.2 per cent but downgraded next year's forecast to 2.7 per cent — 0.2 percentage points lower than the July forecast. There is a 25 per cent probability that growth could fall below 2 per cent next year, it said in its World Economic Outlook report released on Tuesday.

This is the weakest growth profile since 2001, except for the 2008 global financial crisis and the acute phase of the Covid-19 pandemic, and reflects significant slowdowns for the largest economies, the fund said.

Countries that account for about a third of the global economy are set to contract this year or next, and the world's largest economies — the US and China — along with the euro area will continue to stall.

“In short, the worst is yet to come, and for many people 2023 will feel like a recession,” said Pierre-Olivier Gourinchas, IMF chief economist.

Advanced economies are now set to grow by 2.4 per cent this year, compared with an earlier 2.5 per cent estimate, after expanding 5.2 per cent in 2021. They are forecast to expand 1.1 per cent in 2023. The US, the biggest of the group, is forecast to expand 1.6 per cent, instead of a previous 2.3 per cent estimate and down from 5.7 per cent last year.

Rising consumer prices forced the US Federal Reserve last month to raise its policy rate by 75 basis points, its third consecutive three quarters of a percentage-point increase. The central bank is expected to raise rates again early next month, as it aims to bring inflation down towards its target range of 2 per cent. Inflation in the US, which reached a four-decade high, earlier this summer, hit 8.3 per cent in August.

The euro area, which includes 19 EU countries that use the euro as their primary currency, faces an energy crisis as a result of the face-off with Russia over its war in Ukraine. Natural gas prices in Europe increased fourfold after Russia cut deliveries to less than 20 per cent of their 2021 levels, and the energy crisis is sharply increasing costs of living and hampering economic activity.

The euro area is forecast to grow 3.1 per cent this year and 0.5 per cent next, after expanding 5.2 per cent in 2021.

Germany, Europe's largest economy, is set to grow to 1.5 per cent this year and contract by 0.3 per cent in 2023, after it expanded 2.6 per cent in 2021.

France, the euro area's second-largest economy, is forecast to grow 2.5 per cent this year, with output estimated at 0.7 per cent in 2023, after a 6.8 per cent expansion in 2021.

Japan, the world's third-largest economy, which started to welcome foreign visitors as of Tuesday, is projected to grow 1.7 per cent this year and 1.6 per cent in 2023.

The UK slipped a notch to become the world's sixth-largest economy due to its economic crisis, which drove the pound to its lowest level against the US dollar, led to a collapse in British government bond prices and almost led pension funds to buckle. It is expected to expand 3.6 per cent in 2022 and decelerate to 0.3 per cent in 2023, after expanding 7.4 per cent last year.

Emerging market and developing economies are now projected to grow 3.7 per cent this year, down from 6.6 per cent in 2021, with China's output slowing to 3.2 per cent this year and 4.4 per cent in 2023, after an 8.1 per cent expansion last year.

“As the global economy is headed for stormy waters, now is the time for emerging market policymakers to batten down the hatches,” Mr Gourinchas said.

A slowdown in China’s economy has added to global supply chain disruptions and crimped global growth. The world's second-largest economy grew at its slowest pace — since the onset of the coronavirus pandemic in 2020 — in the second quarter of this year, due to renewed Covid-19 outbreaks and the country's zero-Covid approach that led to new lockdowns.

China's property sector, which accounts for about one fifth of its economic output, is rapidly weakening, Mr Gourinchas warned.

The size of China’s economy and its importance for global supply chains, will weigh heavily on global trade and activity, he said.

The Middle East and Central Asia are forecast to grow 5 per cent this year and decelerate to 3.6 per cent in 2023, after expanding 4.5 per cent in 2021.

Saudi Arabia, the Arab world’s largest economy, is forecast to grow 7.6 per cent, after expanding 3.2 per cent last year. The kingdom, the world's largest exporter of oil, has benefitted from the rally of crude prices this year after Brent, the global benchmark for two thirds of the world's oil, rose about 67 per cent in 2021 and gained about 20 per cent since the start of this year.

Mr Gourinchas said the sharp appreciation of the US dollar is piling significant pressure on domestic prices and stoking the cost of living crisis for emerging market and developing economies.

The US dollar index has gained more than 18 per cent since the start of this year and has increased 20 per cent since last year, making it more challenging for emerging and developing countries.

Food commodity prices surged after the outbreak of the Ukraine war but corrected to pre-war levels in June and July. But looking ahead, risks of renewed export restrictions, droughts in part of China and the US, and higher fertiliser prices could drive up prices again, according to the IMF.

The stronger dollar has increased the price of imports and food costs globally, with rising inflation prompting higher interest rates from central banks around the world as they tighten monetary policy to restore price stability.

“Persistent and broadening inflation pressures have triggered a rapid and synchronised tightening of monetary conditions, alongside a powerful appreciation of the US dollar against most other currencies,” Mr Gourinchas said.

“Tighter global monetary and financial conditions will work their way through the economy, weighing demand down and helping to gradually subjugate inflation.”

Mr Gourinchas warned of risks from under and over-tightening by central banks. Under-tightening could entrench the inflation process, erode the credibility of central banks and de-anchor inflation.

“As history repeatedly teaches us, this would only increase the eventual cost of bringing inflation under control,” he said. “Over-tightening risks pushing the global economy into an unnecessarily harsh recession.”

The IMF expects global inflation to peak in late 2022 at 8.8 per cent and to remain elevated for longer than previously expected, before decreasing to 4.1 per cent by 2024. Inflation is forecast at 6.5 per cent in 2023.

“Challenges do not imply that a large downturn is inevitable,” Mr Gourinchas said.