A grain factory on the outskirts of Lviv, Ukraine, on July 22, 2022. Photo / Diego Ibarra Sanchez, The New York Times
A grain factory on the outskirts of Lviv, Ukraine, on July 22, 2022. Photo / Diego Ibarra Sanchez, The New York Times
The world could soon be on the brink of a global recession as the economies of the United States, China and Europe slow more sharply than anticipated amid a collision of crises, the International Monetary Fund has warned.
In an update of the World Economic Outlook, the IMF said onTuesday (Wednesday NZT) that economic prospects had darkened significantly in recent months as war in Ukraine, inflation and a resurgent pandemic inflicted pain on every continent. If the thicket of threats continues to intensify, the world economy faces one of its weakest years since 1970, a period of intense stagflation across the globe.
"The world may soon be teetering on the edge of a global recession, only two years after the last one," Pierre-Olivier Gourinchas, the IMF's chief economist, wrote in a blog post accompanying the report. Put simply, the outlook for the global economy is "increasingly gloomy", he wrote.
The IMF downgraded its global growth forecasts from its April projections, predicting that output will fall to 3.2 per cent in 2022, from 6.1 per cent last year. Growth is expected to slow even further next year as central banks around the world raise interest rates in an effort to tame inflation by cooling their economies.
Inflation is also rising more rapidly and broadly than the IMF anticipated earlier this year. It now expects prices to rise 6.6 per cent in rich countries and 9.5 per cent in emerging markets and developing economies.
The IMF now expects prices to rise 6.6 per cent in rich countries and 9.5 per cent in emerging markets and developing economies. Photo / AP
The international group also warned of another problem that could emerge as the Federal Reserve raises interest rates. Higher rates are expected to further strengthen the US dollar as investors plow into Treasury bonds that offer lucrative returns. The IMF said that inflation in emerging markets could be amplified as the appreciation of the dollar makes the imports that they buy with their local currencies more expensive. Poor countries are already struggling to cope with a food crisis, as exports of grains and cooking oils from Russia and Ukraine have been disrupted by the war, fuelling a surge in food costs and raising fears about the prospects of famine and social unrest.
"The risks to the outlook are overwhelmingly tilted to the downside," the IMF said.
The economic storm facing the world is the result of diminished consumer spending power in the United States, the effects of Russia's invasion of Ukraine on Europe's economies, and the property crisis and lockdowns in China, where Beijing continues to take severe measures to contain coronavirus outbreaks.
The IMF underscored that its forecasts are subject to considerable uncertainty and that more downgrades could come. It pointed to the prospect of a sudden shutdown of Russian gas flows to Europe, the stubborn persistence of inflation and more widespread lockdowns in China as looming threats.
"Under this scenario, both the United States and the euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world," Gourinchas said.
According to the report, the likelihood of a global recession is rising. It said the probability of a recession starting in one of the Group of 7 advanced economies was now nearly 15 per cent, four times its usual level. And it said some indicators suggested that the United States was already in a "technical" recession, which the IMF defines as two consecutive quarters of negative growth.
Data set for release on Thursday is expected to show that the US economy grew little or perhaps shrank in the second quarter of 2022.
At a news conference following the release of the report, Gourinchas added that the IMF was not currently projecting that the United States was in a recession and that even if its economy contracted in the second quarter, defining a recession can be complicated.
"The recession in the way it is defined typically is looking at more than just output, you want to take into account the strength of the labour market," Gourinchas said. "The general assessment as to whether the economy is in a recession overall is a little bit more complex."
Gourinchas also suggested that the kind of "soft landing" that the Fed is trying to engineer — where it cools the economy just enough without setting off a recession — will be difficult to achieve. As the labour market cools, even a small "shock" could tip the economy into a recession, he said.
"The current environment suggests that the likelihood that the US economy can avoid a recession is actually quite narrow under our current projections," he said.
The Fed is expected to raise interest rates by three-quarters of a percentage point on Wednesday and policymakers have indicated they expect additional rate increases throughout the year as they try to stamp out inflation.
