Rising inflation and slowdowns in the United States and China led the IMF on Tuesday (26) to downgrade its growth outlook for the world economy this year and next and to warn that the situation could get much worse.
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Last year’s “tentative recovery” after the pandemic recession was followed by an “increasingly gloomy 2022 as risks began to materialize,” says the International Monetary Fund, which considers a recession increasingly likely.
“Several factors have affected a world economy already weakened by the pandemic,” including the war in Ukraine, which has pushed up food and energy prices, prompting central banks to raise interest rates, explains an update to the World Economic Outlook (WEO) report.
The WEO cut the estimate for world GDP growth for 2022 to 3.2%, 0.4 percentage points lower than the April forecast.
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Confinements by covid-19 and the worsening real estate crisis have put more obstacles in the way of economic activity in China, while the Federal Reserve’s aggressive interest rates have slowed growth in the United States.
Warning
The IMF issues a clear warning: growth prospects have “fallen sharply” and if risks materialize they could lead the world economy into one of the worst recessions in fifty years.
What worries most are the consequences of the war in Ukraine, including the possibility that Russia will cut off natural gas supplies to Europe, and a further increase in food prices from the war’s effect on grain supplies, which could trigger famine.
He added: if these “shocks” are too impactful” they could cause stagflation, when there is recession and economic stagnation. This would knock out growth for good, reducing it to 2% in 2023, a rate only seen five times since 1970, the IMF warns.
Priority: Inflation
“Controlling inflation should be the priority” of governments, the IMF maintains, even if this includes difficult measures for citizens, since the damage caused by an uncontrolled inflation would be much worse.
“Tighter monetary policy will inevitably bring real economic costs, but postponing it may cost even more.”
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The IMF forecasts that consumer prices will rise 8.3 percent this year and in emerging markets they could rise 9.5 percent.
United States and China
The world economy was slightly better than expected in the first three months of the year, but appears to have “shrunk in the second quarter, the first contraction since 2020,” the IMF says.
The IMF lowered growth forecasts for most countries, including the United States and China, which lost more than a percentage point from previous forecasts.
Growth in the United States for this year is forecast at 2.3 percent, as consumers are spending less and interest rates are rising. The report does not rule out that a recession has already begun, following two quarters of negative growth.
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The outlook regarding China is for a drastic slowdown in 2022, down to 3.3 percent, the lowest expansion in four decades, except for the crisis period by the pandemic in 2020.
Brazil and Mexico
“The slowdown in China has global consequences: confinements, disruptions in global supply networks, and lower domestic demand reduce demand for goods and services from Beijing’s trading partners,” the report warns.
Some countries are exceptions to the gloomy outlook, including Italy, Brazil and Mexico, as well as Russia, which benefits from rising oil prices, the WEO says.
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For Brazil the estimate is 1.7% (+0.9 percentage points compared to April), while Mexico should grow 2.4% (+0.4 percentage points). In 2023, both should grow less than expected: Brazil 1.1% and Mexico 1.2%.
For Latin America and the Caribbean, the IMF raised its growth outlook for this year by up to 3%, an upward revision of 0.5 percentage points “as a result of a stronger recovery in large economies” such as Brazil, Mexico, Colombia, and Chile.
