Advertisement

2023 will ‘feel like a recession’ for many, IMF warns in revised global outlook

Click to play video: 'IMF cuts 2023 global economy outlook amid Ukraine war, energy crisis'
IMF cuts 2023 global economy outlook amid Ukraine war, energy crisis
International Monetary Fund (IMF) Research Development Director Pierre-Olivier Gourinchas announced on Tuesday that the organization has downgraded the global economic outlook amid colliding pressures from the war in Ukraine, high energy and food prices, inflation and sharply higher interest rates, warning that conditions could worsen significantly next year – Oct 11, 2022

The International Monetary Fund on Tuesday cut its global growth forecast for 2023 amid colliding pressures from the war in Ukraine, high energy and food prices, inflation and sharply higher interest rates, warning that conditions could worsen significantly next year.

The Fund said its latest World Economic Outlook forecasts show that a third of the world economy will likely contract by next year, marking a sobering start to the first in-person IMF and World Bank annual meetings in three years.

“The three largest economies, the United States, China and the euro area will continue to stall,” IMF chief economist Pierre-Olivier Gourinchas said in a statement. “In short, the worst is yet to come, and for many people, 2023 will feel like a recession.”

Read more: Deloitte forecasts short-lived recession in 2023, but says job losses shouldn’t be severe

Read next: Longtime CBC journalist, editor dead after random assault in Toronto

Story continues below advertisement

The IMF said global GDP growth next year will slow to 2.7 per cent, compared to a 2.9 per cent forecast in July, as higher interest rates slow the U.S. economy, Europe struggles with spiking gas prices and China contends with continued COVID-19 lockdowns and a weakening property sector.

The Fund is keeping its 2022 growth forecast at 3.2 per cent, reflecting stronger-than-expected output in Europe but a weaker performance in the United States, after torrid 6.0 per cent global growth in 2021.

Click to play video: 'Freeland seeks to strengthen ties as IMF warns of recession'
Freeland seeks to strengthen ties as IMF warns of recession

U.S. growth this year will be a meager 1.6 per cent – a 0.7 percentage point downgrade from July, reflecting an unexpected second-quarter GDP contraction. The IMF kept its 2023 U.S. growth forecast unchanged at 1.0 per cent.

A U.S. Treasury official said before the release of the IMF forecasts that the U.S. economy “remains quite resilient, even in the face of some significant global headwinds.”

Story continues below advertisement

Priority: Inflation

The IMF said its outlook was subject to a delicate balancing act by central banks to fight inflation without over-tightening, which could push the global economy into an “unnecessarily severe recession” and cause disruptions to financial markets and pain for developing countries. But it pointed squarely at controlling inflation as the bigger priority.

“The hard-won credibility of central banks could be undermined if they misjudge yet again the stubborn persistence of inflation,” Gourinchas said. “This would prove much more detrimental to future macroeconomic stability.”

The Fund forecast headline consumer price inflation peaking at 9.5 per cent in the third quarter of 2022, declining to 4.7 per cent by the fourth quarter of 2023.

Read more: Canada’s rising prices becoming entrenched, recession may be needed: economists

Read next: ‘Dr. Phil’ talk show to end after 21 years on the air

Story continues below advertisement

A “plausible combination of shocks” including a 30 per cent spike in oil prices from current levels could darken the outlook considerably, the IMF said, pushing global growth down to 1.0 per cent next year – a level associated with widely falling real incomes.

Other components of this “downside scenario” include a steep drop-off in Chinese property sector investment, a sharp tightening of financial conditions brought on by emerging market currency depreciations and labor markets remaining overheated resulting in lower potential output.

The IMF put a 25 per cent probability of global growth falling below two per cent next year – a phenomenon that has occurred only five times since 1970 – and said there was a more than 10 per cent chance of a global GDP contraction.

Click to play video: 'Poiliviere criticizes Liberals for ‘tripling, tripling, tripling’ carbon tax as families struggle financially'
Poiliviere criticizes Liberals for ‘tripling, tripling, tripling’ carbon tax as families struggle financially

These shocks could keep inflation elevated for longer, which in turn could keep upward pressure on the U.S. dollar, now at its strongest since the early 2000s. The IMF said this is pressuring emerging markets, and further dollar strength could increase the likelihood of debt distress for some countries.

Story continues below advertisement

Emerging market debt relief is expected to be a major topic of discussion among the world’s global financial policymakers at the Washington meetings, and Gourinchas said now was the time for emerging markets to “batten down the hatches” to prepare for more difficult conditions. The appropriate policy for most was prioritizing monetary policy for price stability, letting currencies adjust and “conserving valuable foreign exchange reserves for when financial conditions really worsen.”

Sponsored content