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Home macroeconomy

2023 will feel like a recession, one-third of the world economy will likely contract – IMF

Rate Captain by Rate Captain
October 14, 2022
in macroeconomy
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2023 will feel like a recession, one-third of the world economy will likely contract – IMF
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The International Monetary Fund (IMF), in its October 2022 World Economic Outlook, maintained the growth forecast for 2022 at 3.2 percent while the projection for 2023 was lowered to 2.7 percent–0.2 percentage points contraction of the July forecast. 

The outlook for 2023 suggests a broad-based slowdown of the global economy as the three largest economies; the United States; China; and the euro area, that account for about one-third of the global economy, continue to stall and are poised to contract this year or next.

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This information is based on an economic update by the Fund available on its website.

The acceleration of monetary and fiscal tightening in the US will slow growth to 1 percent in 2023, according to the Fund. The IMF lowered China’s growth projection to 4.4 percent due to the country’s COVID-19 mitigation response (continued lockdown) in the country and its weakening property sector. In the eurozone, the existing energy crisis caused by the war in Ukraine is having a knock-on effect on the region’s economy, resulting in a more pronounced slowdown as the region’s growth is projected to shrink to 0.5 percent in 2023.

Already there are occurrences of shrinking real income and rapidly accelerating price levels, particularly for food and energy around the world. These are causing hardship, especially for the poor and vulnerable.

The IMF believes that “policymakers need a steady hand as storm clouds gather over the global economy,” noting that inflationary pressures have deepened and become more aggressive than expected despite the economic slowdown. Now, global inflation is anticipated to reach 9.5 percent this year before slowing down to 4.1 percent by 2024. The Fund stressed that inflation is also broad-based, as global core inflation, excluding food and energy, rose from an annualized monthly rate of 4.2 percent at end-2021 to 6.7 percent in July for the median country.

According to the Fund, there exist challenging policy trade-offs in addressing the cost-of-living crisis. It said, “the risk of monetary, fiscal, or financial policy miscalibration has risen sharply amid high uncertainty and growing fragilities.”

“Global financial conditions could deteriorate, and the dollar strengthens further, should turmoil in financial markets erupt, pushing investors towards safe assets. This would add significantly to inflation pressures and financial fragilities in the rest of the world, especially emerging markets and developing economies.”

“Inflation could, yet again, prove more persistent, especially if labor markets remain extremely tight.”

“Finally, the war in Ukraine is still raging and further escalation can exacerbate the energy crisis.”

The Fund also drew attention to the existing fiscal-policy conundrum, as formulating the appropriate fiscal response to the cost-of-living crisis has become a serious challenge.

It noted that fiscal policy measures geared towards protecting low-income families from large real income losses and ensuring their access to food and energy should not counter monetary policy efforts and exacerbate inflation.

IMF stated that: “Fiscal policy should not work at cross-purpose with monetary authorities’ efforts to bring down inflation. Doing so will only prolong inflation and could cause serious financial instability.”

What the IMF is Recommending
The IMF believes now is the time for emerging market policymakers to be more meticulous as the global economy is headed for turbulent waters. It said:

“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 worsen.”

“Eligible countries with sound policies should urgently consider improving their liquidity buffers, including by requesting access to precautionary instruments from the Fund. Countries should also aim to minimize the impact of future financial turmoil through a combination of preemptive macroprudential and capital flow measures, where appropriate”

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