IMF again cuts global growth forecast, highlighting inflation risks

WASHINGTON, July 26 (Xinhua) -- The International Monetary Fund (IMF) on Tuesday revised down global growth forecast for 2022 and 2023 amid a higher-than-expected inflation, tighter financial conditions and the Ukraine crisis, warning that balance of risks is "squarely to the downside."

In the newly released update to its World Economic Outlook (WEO), the IMF said that inflation could "remain stubbornly high" and disinflation could prove more costly than expected. In a "plausible alternative scenario," global growth will decelerate further to a pace close to a global recession.

GLOOMY, UNCERTAIN OUTLOOK

The IMF on Tuesday slashed the global growth forecast for this year to 3.2 percent, down by 0.4 percentage point from the April projection. It previously revised down 2022 global growth forecast in January and April.

The global economy "is facing an increasingly gloomy and uncertain outlook," IMF chief economist Pierre-Olivier Gourinchas told a virtual press conference Tuesday, noting that many of the downside risks flagged in the IMF's April WEO have begun to materialize.

Global inflation has been revised up due to food and energy prices, and is anticipated to reach 6.6 percent in advanced economies and 9.5 percent in emerging markets and developing economies this year -- upward revisions of 0.9 and 0.8 percentage point respectively, the WEO update showed.

In the United States, the consumer price index (CPI) in June surged 9.1 percent from a year ago, hitting a fresh four-decade high, according to the Labor Department's Bureau of Labor Statistics. Headline CPI has been over 8 percent since March this year.

"Higher-than-expected inflation worldwide" -- especially in the United States and major European economies -- triggering tighter financial conditions, and further negative spillovers from the Ukraine crisis, are among the several shocks hitting the world economy "already weakened by the COVID-19 pandemic," the IMF noted.

In 2023, as central banks continue their efforts to rein in surging prices, "disinflationary monetary policy is expected to bite," with global output growing by just 2.9 percent, according to the IMF.

In its latest Global Economic Prospects released in early June, the World Bank Group projected that global growth is expected to slump to 2.9 percent in 2022 and hover around that pace over 2023-2024, warning of stagflation risk.

Compounding the damage from the COVID-19 pandemic, the Ukraine crisis has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation, the World Bank noted.

PESSIMISTIC SCENARIO

Gourinchas noted that the risks to the global outlook are "overwhelmingly tilted to the downside."

To be more specific, the Ukraine crisis could lead to a sudden stop of European gas imports from Russia, inflation could "remain stubbornly high" if labor markets remain overly tight or inflation expectations de-anchor, or disinflation proves more costly than expected, and tighter global financial conditions could induce a surge in debt distress in emerging markets and developing economies, according to the WEO update.

In a "plausible alternative scenario" where some of these risks materialize, inflation will rise and global growth will decelerate further to about 2.6 percent this year and 2 percent next year -- a pace that growth has fallen below just five times since 1970.

"That would put us in sort of the bottom part of the growth distribution," Gourinchas told Xinhua in a virtual interview Tuesday. "Not necessarily quite a recession, but really, really, very close to it."

"There's gonna be quite a bit of pain in the global economy," said the IMF chief economist, noting that there will be a slowdown in income growth for a lot of people, and unemployment might increase in a number of countries.

Under this scenario, both the United States and the euro area will experience near-zero growth next year, "with negative knock-on effects for the rest of the world," according to the WEO update.

For the United States, there is a narrowing path to avoiding a recession, IMF Managing Director Kristalina Georgieva said at a press conference on the annual Article IV consultation to review the U.S. economy in late June.

The IMF estimates that in the fourth quarter of 2023, the U.S. economy will grow only by 0.6 percent from the fourth quarter of 2022.

"It wouldn't take much, maybe inflation that remains a little bit more persistent or confidence is dropping down or financial market instability or anything that might happen in the world. And that would be enough to sort of knock off the U.S. economy into a recession," Gourinchas told Xinhua.

Noting that the United States is the largest economy, the IMF chief economist said a dramatic slowdown in U.S. economic activity would have "repercussions" on the rest of the world.

GLOBAL TIGHTENING TIDE

The IMF's WEO update highlighted persistently high inflation as one of the downside risks, noting that several factors could cause inflation to maintain momentum.

"Further supply-related shocks to food and energy prices from the war in Ukraine could sharply increase headline inflation and pass through to core inflation, triggering a further tightening in monetary policy," the IMF said.

"Such shocks could, if sufficiently severe, cause a combination of recession accompanied by high and rising inflation ("stagflation")," it said.

"There is one overwhelming priority at this point, and it is to bring back price stability in advanced economies and in emerging markets," Gourinchas said.

Going forward, it's very clear that the tightening by major central banks is going to have a continued effect on the rest of the world, he noted.

First, there's going to be reduced demand and economic activity at the global level, which will weigh on countries that rely a lot on the export sector for growth.

Second, the tightening in the United States and other central banks is also leading to a major appreciation of the U.S. dollar against emerging market currencies, increasing inflation pressures in these countries.

Third, there is a general tendency by investors to move away from emerging market economies and seek safe havens in a cycle like this, investing in U.S. treasuries or other safe assets, Gourinchas said, noting that there has been "persistent" capital flows moving out of emerging markets in the last four or five months.

Noting that the emerging market economies so far have been quite resilient, Gourinchas told Xinhua that "we could see at some point some of these financial tightness, some of these financial pressure starting to really bear down on some emerging market economies."

"So things have not been too disorderly up until now, but of course we are concerned as to whether this might continue in the future," the IMF chief economist said.

The U.S. Federal Reserve, which has already hiked interest rates by 150 basis points since March this year, is on an aggressive rate hike cycle. Given its important role in the global financial system, the Fed's rate hikes could have spillover effects on emerging markets.

Desmond Lachman, senior fellow at the American Enterprise Institute and a former IMF official, recently told Xinhua that higher U.S. interest rates are already causing a large outflow of capital from emerging markets in very much the same way they have done on previous occasions.

"This is causing emerging market currencies to slump and is now raising the prospect of a large wave of debt defaults in the highly indebted emerging market economies," Lachman said.