IMF warns of slowing growth and increasing market risks as finance officials meet

WASHINGTON (Reuters) – The International Monetary Fund warned on Tuesday that mounting pressures from war-induced inflation, food and energy crises and sharp interest rate hikes are pushing the world to the brink of recession and threatening the stability of financial markets.

In grim reports released at the start of the first annual meetings of the International Monetary Fund and the World Bank in three years, the International Monetary Fund urged central banks to continue their fight against inflation despite the pain of monetary tightening and a rally in the United States. The dollar reached a two-decade high, the two main drivers of the recent bout of financial market volatility.

The International Monetary Fund has cut its global growth forecast for 2023 further, saying in its World Economic Outlook that countries that account for a third of global output could be in recession next year.

“The three largest economies, the United States, China and the eurozone, will continue to falter,” Pierre-Olivier Gorinchas, chief economist at the International Monetary Fund, said in a statement. In short, the worst is yet to come, and for many people, 2023 will feel stagnant.

The International Monetary Fund said global GDP growth next year will slow to 2.7%, compared to its July forecast of 2.9%, as high interest rates slow the US economy, Europe struggles with high gas prices, and China struggles with the continued COVID-19 lockdown and weakening real estate sector.

The World Bank kept its 2022 growth forecast at 3.2%, reflecting stronger-than-expected production in Europe but a weaker performance in the United States, after global growth of 6.0% last year as the COVID-19 pandemic subsided.

Some major European economies will fall into a “technical recession” next year, including Germany and Italy, with rising energy prices and production shortages. The International Monetary Fund said China’s growth forecast has also been lowered as it struggles with a persistent COVID-19 shutdown and a weak real estate sector, where a deeper slowdown will slow growth further.

The International Monetary Fund said in its Global Financial Stability Report that mounting economic pressures, along with tightening liquidity, stubborn inflation and persistent financial vulnerabilities, are increasing the risks of repricing of unregulated assets and contagion of financial markets.

“It’s hard to think of a time when uncertainty is so high,” Tobias Adrian, director of monetary and capital markets at the International Monetary Fund, told Reuters in an interview. “We have to go back decades to see a lot of conflict in the world, and at the same time inflation is very high.”

Finance officials from the International Monetary Fund’s 190 member countries are grappling this week with such uncertainties from various economic situations in Washington, along with food and energy crises caused by the war in Ukraine and other global challenges including massive clean energy financing needs.

Priority: Blowing

The IMF said central bankers had done a delicate balancing act to fight inflation without over-tightening, which could push the global economy into an “unnecessarily severe recession” and add to economic pain in emerging markets that are seeing their currencies fall sharply against the dollar.

But Gorenchas said controlling inflation is the biggest priority, and capitulating early would undermine “the hard-earned credibility of central banks”.

“What we are recommending is that central banks continue their course. Now that doesn’t mean they should speed up compared to what they have been doing,” Gorinchas told a news conference, adding that it was “too early” for the turnaround cycle.

“I think now our advice is, let’s make sure we see a decisive drop in inflation.”

The International Monetary Fund has forecast that global consumer price inflation will peak at 9.5% in the third quarter of 2022, declining to 4.7% by the fourth quarter of 2023.

The International Monetary Fund said the outlook could turn largely bleak if the global economy experiences a “reasonable set of shocks,” including a 30% rise in oil prices from current levels, sending global growth down to 1.0% next year – a level related to that. With real income falling on a large scale.

Other components of this “bearish scenario” include a sharp decrease in investment in the Chinese real estate sector, a sharp tightening of financial conditions caused by currency depreciation in emerging markets, and the continued warming of labor markets leading to a potential production decline.

The International Monetary Fund put a 25% chance that global growth will fall below 2% next year – a phenomenon that has occurred only five times since 1970 – and said there is a 10% higher chance of a global GDP contraction.

(Reporting by David Lauder) Editing by Paul Simao

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