With Fed's policy spillovers raising concern, global economy may slip into recession

(Xinhua) 11:28, October 13, 2022

WASHINGTON, Oct. 12 (Xinhua) -- The International Monetary Fund (IMF) on Tuesday projected global economic growth to slow from 6.0 percent in 2021 to 3.2 percent this year and 2.7 percent in 2023, warning of "unusually large" downside risks and recession possibility.

Amid stubbornly high inflation rates, a wave of interest rate hikes by central banks in advanced economies -- such as the U.S. Federal Reserve -- is contributing to a global economic slowdown and tighter financial conditions, leading to difficulties for emerging markets and developing countries, especially low-income developing countries.


The global economy is experiencing "a number of turbulent challenges," with inflation higher than seen in several decades, tightening financial conditions in most regions, the Russia-Ukraine conflict, and the lingering COVID-19 pandemic all weighing heavily on the outlook, the IMF's latest World Economic Outlook report said.

This is the weakest growth profile since 2001, except for the global financial crisis and the acute phase of the pandemic, and "reflects significant slowdowns for the largest economies," the report noted.

The energy crisis, especially in Europe, is not a transitory shock, IMF chief economist Pierre-Olivier Gourinchas told a press conference at the 2022 Annual Meetings of the IMF and the World Bank on Tuesday.

Gourinchas said that the upcoming winter would be challenging, but the winter in 2023 will likely be worse.

IMF forecasts show slowing growth in major economies such as the United States and the European Union. The slowdown is most pronounced in the euro area, where the energy crisis will continue to take a heavy toll, reducing growth to 0.5 percent in 2023, the report noted.

A contraction in real GDP lasting for at least two consecutive quarters, which some economists call a "technical recession," is seen at some point during 2022-2023 in about 43 percent of economies, amounting to more than one-third of world GDP, the report said.

"Even when growth is positive, it will feel like a recession because of shrinking real incomes and rising prices," IMF Managing Director Kristalina Georgieva said last week in a curtain raiser speech at the Annual Meetings.

Noting that risks to the outlook remain unusually large and to the downside, the IMF report said that monetary policy could miscalculate the right stance to reduce inflation, more energy and food price shocks might cause inflation to persist for longer and global tightening in financing conditions could trigger widespread emerging market debt distress.

The IMF warned that geopolitical fragmentation could impede trade and capital flows, further hindering climate policy cooperation.

In a more pessimistic scenario, the IMF estimated that there is about a one-in-four probability that global growth next year could fall below the historically low level of 2 percent. If many of the risks materialize, there is about a 10 to 15 percent probability that global growth would decline to 1.1 percent with quasi-stagnant income per capita in 2023.

"Two percent is still ahead of population growth, which is about 1 percent, so only if you have growth going down to something like 1 percent, then we are looking at something that looks like a global recession," Daniel Leigh, who heads the World Economic Studies division in the IMF's Research Department, told Xinhua on Tuesday.


A wave of rate hikes in advanced economies by the Fed, the European Central Bank and the Bank of England -- though necessary to curb surging inflation -- is cooling the world economy, contributing to the slowdown in global growth, Leigh said.

"It means that there's pain and there's pain also for the emerging markets, just because people are buying less of their products," he said, noting that those exporting commodities would suffer.

A strong dollar for countries with debt in dollars makes the debt much harder to pay. Poorer countries are likely to bear the brunt, said Leigh.

The IMF said that more than a quarter of emerging economies have either defaulted or had bonds trading at distressed levels, and over 60 percent of low-income countries are in -- or at high risk of -- debt distress.

"Emerging markets are confronted with a multitude of risks from the strength of the U.S. dollar, high external borrowing costs, stubbornly high inflation, volatile commodity markets, heightened uncertainty about the global economic outlook, and pressures from policy tightening in advanced economies," the IMF said in its latest Global Financial Stability Report, also released Tuesday.

"So certainly financial conditions are tightening globally, and that is true in the United States, (and) it is true in many countries around the world, and there's certainly spillovers of the tightening onto other countries," Tobias Adrian, director of the IMF's Monetary and Capital Markets Department, said at a press conference in response to a question from Xinhua.

"A stronger dollar, higher interest rates, of course are tightening financial conditions for countries around the world," said Adrian. "And, that might continue going forward as well."

In a study released mid-September, the World Bank warned that as central banks worldwide simultaneously hike interest rates in response to inflation, the world may be edging toward a global recession in 2023, with growth slowing to 0.5 percent.

Noting that the dollar's strength is "a major challenge," Gourinchas 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 really worsen."

"If it is becoming to a point where it's creating financial market stress, then there can be a case to step in and do some foreign currency intervention in markets that are very shallow, that can make a positive difference," Leigh told Xinhua.

"Also, we have cases where some use of capital flow management tools can be appropriate if we're getting into a very difficult situation," Leigh said.

The IMF official also noted that policymakers should help those suffering the most through direct cash transfers and keep the overall stance of fiscal policy -- though depending on the country -- relatively neutral "to not get in the way of the fight against inflation." 

(Web editor: Zhong Wenxing, Wu Chaolan)


Related Stories