The warnings that the International Monetary Fund issued about the global economy just months ago are starting to come true, the fund said Tuesday, as it sharply downgraded its growth forecast and cautioned that “gloomy developments” were overtaking 2022.
“The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one,” said IMF chief economist Pierre-Olivier Gourinchas, referring to the downturn caused by the COVID-19 pandemic in 2020.
The economic situation is prompting worries that governments in low-income countries will lack the fiscal power to invest in basic services such as health and education, hurting development goals, Gourinchas told reporters at a press conference, noting that lower-income countries were more exposed to a “combination of shocks” including slower growth.
The latest headline projections in the latest World Economic Report — titled “Gloomy and More Uncertain” — say growth is expected to slow from 6.1% last year to 3.2% in 2022, a decline of 0.4 percentage points from the last IMF forecast in April, and effectively a halving of economic output.
IMF chief sees 'growing risk of a debt crisis'
Some 30% of developing and emerging markets, and 60% of low-income countries, are at or near debt distress, says Kristalina Georgieva.
Notably, the April report itself was a downgrade from previous forecasts, pointing to a trend of an increasingly negative outlook for the economy. Global growth will slow even further to 2.9% next year, according to the latest report.
Worse, IMF says the situation is “extraordinarily uncertain” and risks are “overwhelmingly tilted to the downside,” meaning further bad news seems more likely than not, in no small part due to Russia’s war in Ukraine and continued global supply chain disruptions.
Conditions are pushing inflation up and prices remain stubbornly high, the fund warned, with Gourinchas conceding that experts have been surprised by the persistence of the problem.
The updated outlook warned of a “particularly severe impact” of rising food prices on the world’s poor, adding to economic stress factors in low-income countries because staple commodities such as grain and rice make up such large parts of household budgets.
Gourinchas called on the international community, including the Group of 20 leading industrial and emerging economies, to step up efforts on food supplies and debt relief.
“The world may soon be teetering on the edge of a global recession, only two years after the last one.”
— Pierre-Olivier Gourinchas, chief economist, International Monetary Fund“Rising food and energy prices could cause widespread food insecurity and social unrest,” Gourinchas said.
Capital outflows from emerging markets were “adding pressure” to these countries, he noted, adding that, so far, such large money movements have not been “disorderly” but signaling it was a space to watch.
A big part of the weight on the global economy is slowing growth in the United States, China, and Europe. A major risk the fund is watching is whether Russia will cut off gas supplies to Europe.
IMF’s inflation outlook offers no solace either, as the fund’s economists increased their projections to 9.5% in emerging markets and developing economies, far higher than the price increases being seen in advanced economies, which is due to clock in at 6.6%, itself a historically elevated level.
One way that policymakers try to fight inflation is by raising interest rates, but IMF warned that tightening financial conditions could induce a “surge in debt distress” in lower-income countries. Moreover, rising rates will cause the economy to slow, though the fund says there is no choice.
“Tighter monetary policy will inevitably have real economic costs, but delaying it will only exacerbate the hardship. Central banks that have started tightening should stay the course until inflation is tamed,” Gourinchas said, even as IMF said targeted social support will be vital to offset the hardships on the poor.
Fighting inflation had to be the “top priority,” he added.
IMF called for G-20 countries to “urgently” take steps on debt resolution for the world’s low-income nations, warning that existing frameworks remain “slow and unpredictable.”
While the report predicts that growth in sub-Saharan Africa will be above the global average in the latest projections, this somewhat belies the real situation, given that oil-producing nations are facing large revenue flows due to high prices, while net importers will come under even more pressure, including on their debt burdens.
About the author
Shabtai Gold
Shabtai Gold is a Senior Reporter based in Washington. He covers multilateral development banks, with a focus on the World Bank, along with trends in development finance. Prior to Devex, he worked for the German Press Agency, dpa, for more than a decade, with stints in Africa, Europe, and the Middle East, before relocating to Washington to cover politics and business.
