The International Monetary Fund (IMF) has warned that the risk of a global recession is fast approaching and could happen as soon as 2023 as more than a third of the global economy will contract this year or next.
In its latest World Economic Outlook report yesterday, the IMF painted a grim picture about global growth prospects amid a number of economic headwinds and geopolitical pressures stacked against growth.
The IMF cited high inflation, tightening financial conditions, Russia’s invasion of Ukraine, and the lingering Covid-19 pandemic as main challenges.
IMF chief economist Pierre-Olivier Gourinchas said they now forecast global growth to slow from 6.0% in 2021 to 3.2% in 2022, before declining to 2.7% in 2023, down from 2.9% predicted earlier.
Gourinchas said this was the weakest growth since 2001, except for the global financial crisis and the acute phase of the pandemic.
“Our global growth forecast for this year is unchanged at 3.2%, while our projection for next year is lowered to 2.7% – 0.2 percentage points lower than the July forecast,” Gourinchas said.
“The 2023 slowdown will be broad-based, with countries accounting for about one-third of the global economy poised to contract this year or next.”
Gourinchas said the three largest economies – the US, China and the euro area – would continue to stall.
He said the slowdown was most pronounced in the euro area, where the energy crisis caused by the war will continue to take a heavy toll, reducing growth to 0.5%in 2023.
“Overall, this year’s shocks will reopen economic wounds that were only partially healed post-pandemic,” he said.
“In short, the worst is yet to come and, for many people, 2023 will feel like a recession.”
On Monday, the IMF predicted that the global economy would lose at least $4 trillion through to 2026, adding that more than 60% of low-income countries were at a risk of a widening debt crisis.
Eric LeCompte, an executive director of Jubilee USA Network, said some of the proposed solutions of austerity and higher interest rates would cause pain.
"It seems likely that we are heading into a recession. The US and other large economies will see contractions and this impacts the entire global economy,” LeCompte said.
"The war and rising interest rates are putting developing countries in an even more difficult situation. Rising food and energy prices hurt everyone, in particular the poor.”
Meanwhile, Gourinchas cited the rising risk of monetary, fiscal, or financial policy miscalibration, deteriorating financial conditions, persistently high inflation and the escalation of the war in Ukraine which would exacerbate the energy crisis as serious risks to growth.
“We estimate that there is about a one-in-four probability that global growth next year could fall below the historically low level of 2%,” he said.
“If many of the risks materialise, global growth would decline to 1.1% with quasi stagnant income-per-capita in 2023.
“According to our calculations, the likelihood of such an adverse outcome, or worse, is 10% to 15%.”
Despite the expected economic slowdown, the IMF said inflation pressures were proving broader and more persistent than anticipated.
The IMF said global inflation was now expected to peak at 9.5% this year before decelerating to 4.1% by 2024.
The growth forecast in South Africa was revised slightly lower to 2.1% in 2022 from 2.3% projected in July, and 1.1% in 2023 from 1.4%.
Gourinchas said emerging and developing economies faced increased external borrowing costs, high inflation and volatile commodity markets.
“The appropriate response in most emerging and developing countries is to calibrate monetary policy to maintain price stability while letting exchange rates adjust, conserving valuable foreign exchange reserves for when financial conditions really worsen,” he said.
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