IMF cuts 2023 global growth, warns major economies to stall

A man walks past a Russian rocket embedded in the asphalt on a nearly-deserted street in Kharkiv, Ukraine, on Monday. (Photo: The New York Times)

Global growth is expected to slow further next year, the International Monetary Fund (IMF) said Tuesday, downgrading its forecasts as countries grapple with the fallout from Russia’s invasion of Ukraine, spiralling cost-of-living and economic downturns.

The world economy has been dealt multiple blows, with the war in Ukraine driving up food and energy prices following the Covid-19 outbreak, while soaring costs and rising interest rates threaten to reverberate around the globe.

“This year’s shocks will re-open economic wounds that were only partially healed post-pandemic,” said IMF economic counsellor Pierre-Olivier Gourinchas in a blog post accompanying the fund’s latest World Economic Outlook.

More than a third of the global economy is headed for contraction this year or next, and the three biggest economies — the United States, European Union and China — will continue to stall, he warned.

“The worst is yet to come and, for many people 2023 will feel like a recession,” said Gourinchas.

International Monetary Fund (IMF) chief economist Pierre-Olivier Gourinchas speaks at a press conference during the World Bank/IMF annual meeting at IMF headquarters in Washington, DC, on Tuesday. (Photo: AFP)

In its report, the IMF trimmed its 2023 global GDP forecast to 2.7%, 0.2 points down from July expectations.

Its world growth forecast for this year remains unchanged at 3.2%.

The global growth profile is its “weakest” since 2001, apart from during the global financial crisis and the worst of the coronavirus pandemic, said the IMF.

This reflects slowdowns for the biggest economies, including a US GDP contraction in the first half of 2022 and virus lockdowns in China on top of a property market crisis.

– Laser focus –

A key factor behind the slowdown is a shift in policy as central banks try to bring down soaring inflation, with higher interest rates starting to take the heat out of domestic demand.

Growing price pressures are the most immediate threat to prosperity, said Gourinchas in the report, adding that central banks are now “laser-focused on restoring price stability”.

Global inflation is expected to peak at 9.5% this year before dropping to 4.1% by 2024.

But misjudging the persistence of inflation could prove detrimental to future macroeconomic stability, he warned, “by gravely undermining the hard-won credibility of central banks.”

While current challenges do not mean a large downturn is inevitable, the fund also warned many low-income countries are either in, or close to debt distress.

Progress toward debt restructurings for the hardest-hit is needed to avoid a wave of sovereign debt crisis.

“Time may soon be running out,” said Gourinchas.

– US slowdown –

The IMF has cut forecasts for the two biggest economies, the US and China.

US economic growth is pegged at 1.6% this year, 0.7 points below the fund’s July forecast, due to an unexpected contraction this year.

“Declining real disposable income continues to eat into consumer demand, and higher interest rates are taking an important toll on spending,” the IMF said.

The Federal Reserve has been raising interest rates aggressively to tamp down surging inflation, which is slowing economic activity. And the central bank has said more increases are likely to come.

– IMF cuts China growth forecasts –

The IMF cut its growth forecasts for China for this year and 2023 as strict Covid curbs and a crisis in the property sector fuel a slowdown in the world’s number two economy.

China’s gross domestic product is expected to expand 3.2% this year, slightly lower than originally forecast, and 4.4% next year, the IMF said in its quarterly global forecasts, marking respective declines of 0.1 percentage point and 0.2 percentage points from its previous forecast in July.

The fund cautioned that a worsening of China’s property sector slump could spill over to the domestic banking sector and weigh heavily on growth.

This aerial photo taken on Monday shows a bullet train making its way in Lianyungang in China’s eastern Jiangsu province. (Photo: AFP)

– Germany, Italy to tumble into recession –

Germany and Italy will slip into recession in 2023, becoming the first advanced economies to contract in the wake of Russia’s invasion of Ukraine, according to the IMF forecast.

While the eurozone will avoid a recession, the output of the 19-nation single currency area will slow sharply, eking out 0.5% growth — worse than previously forecast by the IMF.

The war on Europe’s eastern flank has sent inflation soaring higher as energy prices have jumped, forcing the European Central Bank to hike interest rates to cool the economy, at the risk of precipitating a contraction.

Germany — Europe’s biggest economy — has paid dearly for its heavy reliance on gas from Russia, which cut supplies to Europe in suspected retaliation for Western sanctions over the conflict.

The German economy is now expected to shrink by 0.3% in 2023, the IMF said in the update to its World Economic Outlook from July, which had forecast 0.8% growth for the country.

Italy, whose industries are also dependent on gas imports, will see its gross domestic product contract by 0.2% — also a sharp downgrade from 0.9% growth July.

Germany and Italy are the only advanced economies seen going into recession next year in the revised outlook of the IMF.

“Weak 2023 growth across Europe reflects spill-over effects from the war in Ukraine, with especially sharp downward revisions for economies most exposed to the Russian gas supply cuts,” the IMF said.

The report also cited the “tighter financial conditions, with the European Central Bank having ended net asset purchases and rapidly raising policy rates by 50 basis points in July 2022 and 75 basis points in September 2022.”

– ‘Energy shock’ –

Prior to the war, economies were rebounding from the Covid pandemic and central bankers believed the rise in inflation would only be temporary.

But the situation has deteriorated since Russia sent troops into neighbouring Ukraine on Feb 24, 2022.

Russia’s outlook, however, has improved, with the IMF seeing its sanctions-hit economy shrink by 2.3% next year, compared to 3.5% previously.

Across Europe, Russia’s gas cuts and soaring utility prices have prompted countries to launch energy-saving measures — from advising people to lower their thermostats during winter to Paris turning off lights of monuments earlier — while governments scramble to find new sources of supplies.

A gas metre is pictured in a cellar of a home in Bad Honnef near Bonn, Germany, on Jan 4, 2022, as energy costs in the EU are rising. (Photo: Reuters)

“The energy shock in Europe is a really big deal,” said Brian Coulton, chief economist at Fitch ratings agency.

“In many ways, the energy shock is bigger in the EU than the oil shock was in the US in 1973,” he said.

The IMF’s report warns that the situation could worsen.

“Particularly cold temperatures or insufficient gas demand compression this fall could force energy rationing during the winter in Germany,” the report said.

This could have “drastic effects for industry, weighing heavily on the euro area growth outlook and with potential for negative cross-border spill-over effects.”