IMF: the worst is yet to come for the global economy

The International Monetary Fund (IMF) has downgraded its outlook for the global economy next year and said we could be hit by a more severe economic crisis than expected. The war in Ukraine, the slowdown in China and global inflation, which is prompting central banks to raise interest rates, were cited as the main reasons.

“The global economy is facing serious challenges,” IMF chief economist Pierre-Oliver Gourinchas told a news conference. “There are three main forces affecting it – the war in Ukraine, the rise in the cost of living due to inflationary pressures, and the slowdown in the Chinese economy.”

The IMF warns that there are very high risks of making wrong decisions regarding monetary, fiscal and financial policies at the moment. There is also a lot of uncertainty and stress in financial markets. The IMF believes that raising interest rates too fast could lead to a global economic crisis.

At the same time, however, it is said that it is important for countries to control inflation and long-term inflation expectations through monetary policy. Overall, however, the IMF welcomed the Federal Reserve’s current actions.

The IMF expects global inflation to peak at the end of this year but to remain high for longer than expected. Global inflation is seen at 8.8% this year, 6.5% next year and 4.1% in 2024. At the same time, there are acknowledged risks of higher long-term inflation.

In addition, the IMF warned that risks to the global financial system have “deteriorated significantly”. Across major asset classes, market liquidity has fallen markedly, which could lead to unexpected and sharp movements in markets.

Tough times ahead

The IMF’s October outlook suggests that global economic growth could be below 2% next year. The probability of this scenario is assigned to 25%. Historically this is a very low level. Growth has been this low in only five years since 1970. Under the baseline scenario, growth should be 2.7%. In the worst case scenario, which is considered to have a probability of 10-15%, growth is below 1%.

For the global economy, such small numbers matter. The IMF estimates that a third of the global economy will fall.

“In short, the worst is yet to come and many people will have to experience a recession in 2023,” said Gourinchas. “2% is a very low number. It’s only been five years and if you look at those years in more detail, we find that in 1973 there was the oil crisis, in 1981 Volcker sharply raised interest rates, in 2008 there was the global financial crisis. These are all in our collective memory as difficult times.”

Italy’s economy at high risk

IMF economist Petya Koeva Brooks also spoke about the impact of inflation and the energy crisis on the Italian economy.

“We expect Italy to enter a recession [at least two quarters of recession] in the coming quarters. The energy crisis has had a big impact, as well as high inflation, which is having a harmful effect on people’s real incomes.”

When it comes to the risks to Italy’s outlook, things are more likely to turn out worse than expected, Brooks said. The impact of energy markets on Italy will continue to be very large, she said.