The global economy will feel like it is in recession next year, the head of the International Monetary Fund warned on Thursday, as the fund prepared to downgrade its economic forecasts again.
Speaking ahead of the annual meetings of the fund and the World Bank, Kristalina Georgieva said a third of the world’s economy would suffer at least two quarters of economic contraction in 2023. Georgieva added that the combination of “shrinking real incomes and rising prices” would mean many other countries would feel like they were in recession, even if they avoided outright declines in output.
The remarks signal that the IMF is set to downgrade its economic forecasts again next week, for the fourth consecutive quarter.
Blaming “multiple shocks”, including Russia’s invasion of Ukraine, high energy and food prices, and persistent inflationary pressures, she said that growth in all of the world’s largest economies was slowing down, leaving “severe strains” in some places.
The situation was “more likely to get worse than to get better” in the short term, she said, partly because there are emerging financial stability risks in China’s property market, in sovereign debt and in illiquid assets. The near-collapse of some UK pension funds last week following UK chancellor Kwasi Kwarteng’s announcement of £45 billion (€51 billion) worth of unfunded tax cuts has sparked concerns that low growth and higher borrowing costs will trigger market turmoil.
However, the IMF wants central banks to continue to tighten monetary policy at pace to deal with the persistence of inflationary pressures and to ensure that rising prices do not become ingrained in company attitudes to their charges and wages.
“Not tightening enough would cause inflation to become de-anchored and entrenched, which would require future interest rates to be much higher and more sustained, causing massive harm on growth and massive harm on people,” said Ms Georgieva.
She acknowledged, however, that it would be very difficult for monetary policymakers to judge the impact of their policies when they were moving in sync with each other so quickly. Too many big rate rises could lead to a “prolonged recession”, but the risk of doing too little was at present greater, she said.
UK and Germany
Without naming the UK or Germany, the managing director took a swipe at their recently announced measures to tackle high energy prices that insulated households and companies from much of the rise in prices.
The IMF has already publicly rebuked the UK government for its generous energy support and unfunded tax cuts. Georgieva’s speech showed the fund was in no mood to offer more nuanced advice ahead of the visits of finance ministers and central bankers to Washington next week.
Calling for temporary and targeted support for vulnerable families, she said that “controlling prices for an extended period of time is not affordable, nor is it effective”.
She highlighted the inflationary risks of pumping too much money into the economy to protect households at a time when central banks were raising interest rates to slow spending and return inflation to low levels.
“While monetary policy is hitting the brakes, you shouldn’t have a fiscal policy that is stepping on the accelerator. This would make for a very rough and dangerous ride,” said Ms Georgieva.
High food prices were causing pain for households in emerging economies and unsustainable debt crisis in many countries, she added. For countries with an urgent need for food this winter, she offered a new “food shock” borrowing line, where countries could claim up to half of the money they have pledged to the IMF.
The pain in the global economy would not be permanent, she said, but a speedy resolution of the world’s economic problems would depend on co-operation, especially on food security, climate change and debt relief for the most vulnerable countries. – Copyright The Financial Times Limited 2022