IMF's Economic Outlook Is More Bad News, Especially For US, China, Europe

The International Monetary Fund has bad news for the big 3 - the United States, China and the Euro area – and the global economy.  

"The world may soon be teetering on the edge of a global recession, only two years after the last one," writes IMF chief economist Pierre-Olivier Gourinchas in his latest blog ", Global Economic Growth Slows Amid Gloomy and More Uncertain Outlook".  

Slowing growth and the rising spectre of inflation spell a gloomy global economic outlook. At the same time, the aftershocks of the ongoing Covid-19 pandemic and the Russia-Ukraine war continue to haunt global economic recovery.  

But the forecast of economic gloom extending to 2023 was always on the cards, given the grim picture painted by IMF chief Kristalina Georgieva in her recent blog.  

Big 3 Drag World Economy  

The US, China and the Euro Area comprise about 50 per cent of the global economy. Any economic downturn in these countries, as highlighted by Gourinchas in his blog, will drag the global economic recovery.  

"Growth slows from last year's 6.1 per cent to 3.2 per cent this year and 2.9 per cent next year, downgrades of 0.4 and 0.7 percentage points from April. This reflects stalling growth in the world's three largest economies," the blog on the latest World Economic Outlook read.  

Inflation in the US and major European economies is a cause of worry. The US, in particular, recorded inflation of over 9 per cent in July, prompting the US Federal Reserve to hike interest rates by 0.75 percentage points for the second consecutive time.  

The fight against inflation has been compounded by real fears of the US economy going into recession. The economy shrank for the second quarter in a row, declining by 0.9 per cent in the last three months. In quarter one, the economy shrunk by 1.6 per cent.  

In China, continued local lockdowns over COVID-19 are negatively impacting the economy. As per reports, its economy shrank 2.6 per cent in the April-June quarter. IMF, too, has downgraded China's economic growth rate to 3.3 per cent for 2022, which is the lowest in four decades. It has also revised China's 2023 economic growth forecast by 1.3 per cent  

"China's slowdown has been worse than anticipated amid Covid-19 outbreaks and lockdowns," the blog read.  

In particular, the unravelling real estate crisis in China can further cripple economic expansion in the coming quarters.  

The fallout of the Ukraine war and its impact on gas prices is likely to be the biggest economic pain point for the Euro area. Gas prices rose by 30 per cent in just two days after Russia - the country is the pre-dominant energy powerhouse of Europe - cut Nord Stream 1 supply.  

The centrality of natural gas to Europe's economy can be summarised in this European Central Bank economic bulletin statement: "Significant increases in natural gas prices can dampen economic activity through both the consumption channel and the intermediate goods channel." 

The war in Ukraine and tighter monetary policy to tackle inflation has forced IMF to cut its Euro area forecast from 2.6 per cent this year and 1.2 per cent in 2023.  

Inflation Worries Globally 

Fighting inflation seems to be the need of the hour. "Countries must do everything in their power to bring down high inflation," Georgieva had written in her recent blog.  

As per the July economic outlook, inflation is expected to reach 6.6 per cent in advanced economies and 9.5 per cent in emerging markets, which is a revision of 0.9 and 0.8 percentage points, respectively. 

"Inflation at current levels represents a clear risk for current and future macroeconomic stability, and bringing it back to central bank targets should be the top priority for policymakers.," Gourinchas suggests in his blog.  

The IMF has warned that inflationary risks will deaccelerate global economic growth, particularly impacting the US and the euro area.  

These risks include:

1) Complete stoppage of Russian gas flow, which will skyrocket gas prices in energy-dependent Europe,   

2) A spike in debt crises in emerging markets due to tighter financial conditions due to central banks fighting inflation.  

3) Tighter labour markets (especially in advanced countries).  

As per IMF estimates, if these risks materialise, the global growth rate will fall to 2.6 per cent and 2 per cent next year, while the US and the euro zone may experience near-zero growth in 2023.  

"Synchronised monetary tightening" across the world will have real economic costs, Gourinchas writes. Thus, while central banks will look to tame inflation, economic growth may be a casualty.  

Central banks worldwide now face the challenge of 'soft landing' - a popular US phrase to denote such a central bank policy that keeps inflation under check and helps the economy grow.