The International Monetary Fund predicts global growth will slow to 2.7% next year, 0.2 percentage point lower than its July forecast, and anticipates 2023 will feel like a recession for millions around the world.
Aside from the global financial crisis and the peak of the Covid-19 pandemic, this is “the weakest growth profile since 2001,” the IMF said in its World Economic Outlook published Tuesday. Its GDP estimate for this year remained steady at 3.2%, which was down from the 6% seen in 2021.
“The worst is yet to come, and for many people 2023 will feel like a recession,” the report said, echoing warnings from the United Nations, the World Bank and many global CEOs.
More than a third of the global economy will see two consecutive quarters of negative growth, while the three largest economies — the United States, the European Union and China — will continue to slow, the report said.
“Next year is going to feel painful,” Pierre-Olivier Gourinchas, the IMF’s chief economist, told CNBC on Tuesday on the back of the report. “There’s going to be a lot of slowdown and economic pain,” he said.
In its report, the IMF laid out three major events currently hindering growth: Russia’s invasion of Ukraine, the cost-of-living crisis and China’s economic slowdown. Together, they create a “volatile” period economically, geopolitically and ecologically.
The war in Ukraine continues to “powerfully destabilize the global economy,” according to the report, with its impacts causing a “severe” energy crisis in Europe, along with destruction in Ukraine itself.
The price of natural gas has more than quadrupled since 2021, as Russia now delivers less than 20% of 2021 levels. Food prices have also been pushed up as a result of the conflict.
The IMF anticipates that global inflation will peak in late 2022, increasing from 4.7% in 2021 to 8.8%, and that it will “remain elevated for longer than previously expected.”
Global inflation will likely decrease to 6.5% in 2023 and to 4.1% by 2024, according to the IMF forecast. The agency noted the tightening of monetary policy across the world to combat inflation and the “powerful appreciation” of the U.S. dollar
against other currencies.
China’s “zero-Covid policy” — and its resulting lockdowns — continue to hamper its economy. Property makes up around one-fifth of China’s economy, and as the market struggles the ramifications continue to be felt globally.
For emerging markets and developing economies, the shocks of 2022 will “re-open economic wounds that were only partially healed following the pandemic,” the report said.
The IMF also spoke of a “deteriorated” economic outlook in its Global Financial Stability Report, released Tuesday just after its World Economic Outlook. “The global environment is fragile with storm clouds on the horizon,” the report said.
Policymakers around the world are facing an “unusually challenging financial stability environment” where further shocks “may trigger market illiquidity, disorderly sell-offs, or distress,” the report added. Speaking at the 2022 Annual Meetings of the International Monetary Fund and the World Bank Group, Axel Van Trotsenburg, the World Bank’s managing director of operations, echoed the sentiment in both reports.
“We see extreme poverty again increasing. … The number of people living on $7 … That’s 47% of the world population [who are living] in poverty. So this is very clear, people are hurting,” van Trotsenburg told CNBC’s Geoff Cutmore on Tuesday.
World economy is ‘historically fragile’
The IMF also highlighted that the risk of monetary, fiscal or financial policy “miscalibration” had “risen sharply,” while the world economy “remains historically fragile” and financial markets are “showing signs of stress.”
The report comes as analysts debate whether the Federal Reserve acted fast enough on inflation in the U.S. The European Central Bank, meanwhile, has recently entered positive rate territory for the first time since 2014 and the Bank of England has had to announce additional measures this week to stabilize the British economy and a unwanted surge in bond yields.
The report Tuesday suggested “front-loaded and aggressive monetary tightening” is needed, but that a “large” downturn is not “inevitable,” citing tight labor markets in the U.S. and U.K.
The organization also highlighted that “fiscal policy should not work at cross purposes with monetary authorities’ efforts to quell inflation.” Those comments reflect the rare statement issued late last month by the IMF after U.K. Prime Minister Liz Truss laid out a series of tax cuts. The IMF suggested Truss should “re-evaluate” the fiscal package.
When asked if the U.K. was a “poster child for economic illiteracy,” Gourinchas said “certainly not.”
“We’ve welcomed the recent development, the fact that the government has announced a fiscal event at the end of the month and the OBR [Office for Budget Responsibility] is going to be involved in evaluating the proposals,” he said.
“I think all of this is going in the direction of ‘let’s have a 360 on fiscal plans and make sure we’re all pointing in the right direction’,” Gourinchas told CNBC.
Winter 2022 will be challenging, but 2023 ‘will likely be worse’
The energy crisis is also weighing heavily on the world’s economies, particularly in Europe, and it “is not a transitory shock,” according to the report.
“The geopolitical re-alignment of energy supplies in the wake of Russia’s war against Ukraine is broad and permanent,” the report added. “Winter 2022 will be challenging for Europe, but winter 2023 will likely be worse,” the IMF said.
Europe’s approach to the energy crisis has had a mixed response.
U.S. Sen. Chris Murphy criticized Europe’s overreliance on Russian energy, saying it was a mistake for Europe “to have been welded to Russia when it comes to energy” in an interview with CNBC’s Hadley Gamble at the Warsaw Security Forum in Poland on Oct. 4.
CEO Jamie Dimon told CNBC that the crisis was “pretty predictable” and that the U.S. should have been producing more oil and gas.
“America needs to play a real leadership role. America is the swing producer, not Saudi Arabia. We should have gotten that right starting in March,” he said, referring to Russia’s invasion of Ukraine on Feb. 24.
Polish Prime Minister Mateusz Morawiecki said Europe’s current energy issues were “consequences of a very wrong policy, disastrous policy, which was led by Germany.”
“Lack of gas, very expensive prices of gas and electricity all over Europe – this is the real price of the agreement between Germany and Russia,” Morawiecki told CNBC’s Charlotte Reed in an exclusive interview.