Pierre-Olivier Gourinchas, director of research at the International Monetary Fund, speaks at a news conference in Washington on the IMF's world economic outlook.Patrick Semansky/The Associated Press
The International Monetary Fund has cut its global growth forecast and warned of potential financial market disorder, but it is advising central banks to stay the course on monetary policy tightening despite the economic pain it will cause.
The IMF’s biannual World Economic Outlook, published Tuesday, forecasts a significant slowdown in growth next year as the global economy struggles with high inflation and rapidly rising interest rates, geopolitical turmoil caused by the war in Ukraine and ongoing disruptions caused by COVID-19, particularly in China.
“The three largest economies – the United States, the European Union, and China – will continue to stall,” Pierre-Olivier Gourinchas, the IMF’s economic counsellor and head of research, wrote in the introduction to the outlook. “In short, the worst is yet to come, and for many people 2023 will feel like a recession.”
The report will frame discussions in Washington this week, where finance officials and central bankers from around the world are attending the annual meetings of the IMF and the World Bank.
The IMF maintained its forecast of 3.2 per cent global growth for this year but cut its projection for 2023 to 2.7 per cent, which would be the weakest growth since 2001, excluding the depths of the 2008 financial crisis and the early phase of the pandemic. It said that about a third of the world economy will experience a contraction this year or next year.
It also warned that there is a 25-per-cent chance that global growth will fall below 2 per cent next year. This could result from a combination of higher oil prices, further weakening in China’s real estate sector and tighter-than-expected global financial conditions.
In a separate report on financial stability, also published Tuesday, the IMF said financial markets are showing signs of significant strain. Stock and bond prices have fallen sharply, while liquidity has deteriorated in a number of key markets, making it harder to match buyers and sellers and adding to price volatility.
“There is a heightened risk of rapid, disorderly repricing which could interact with – and be amplified by – pre-existing vulnerabilities and poor market liquidity,” said Tobias Adrian, the IMF’s financial counsellor, in the introduction to that report.
The Bank of England expanded its emergency bond-buying program Tuesday to prevent “fire sales” of British government bonds, which the central bank said “pose a material risk to U.K financial stability.”
Despite the darkening outlook, the IMF said central banks need to keep moving forcefully to get inflation back under control.
Rapid and synchronized interest-rate increases are squeezing businesses and consumers around the world, and there is a risk that policy makers will go too far and cause an “unnecessarily harsh recession,” Mr. Gourinchas said. But there is also a risk that central banks won’t do enough to combat soaring prices and will allow high inflation to become entrenched in consumer and business psychology, as happened in the 1970s.
“The costs of these policy mistakes are not symmetric. Misjudging yet again the stubborn persistence of inflation could prove much more detrimental to future macroeconomic stability by gravely undermining the hard-won credibility of central banks,” Mr. Gourinchas said.
This advice contrasts with a recent report by the United Nations Conference on Trade and Development, which said central banks are driving the world economy toward a painful recession and called on policy makers to stop raising interest rates. However, it echoes the hawkish rhetoric coming from many central banks themselves, including the Bank of Canada.
Last week, BoC Governor Tiff Macklem said the bank needs to keep raising interest rates to cool Canada’s overheating economy and keep inflation expectations in check.
The IMF downgraded its 2023 growth forecast for Canada by 0.3 percentage points to 1.5 per cent. That’s lower than the Bank of Canada’s latest forecast, from July, but still puts Canada ahead of all other G7 countries except Japan.
The IMF sees the U.S. economy growing only 1 per cent next year and Britain’s just 0.3 per cent. The economies of Germany and Italy – which are being slammed by high energy prices – are expected to contract by 0.3 per cent and 0.2 per cent respectively.
“The energy crisis, especially in Europe, is not a transitory shock,” Mr. Gourinchas said. “The geopolitical realignment of energy supplies in the wake of Russia’s war against Ukraine is broad and permanent. Winter 2022 will be challenging for Europe, but winter 2023 will likely be worse.”
Mr. Gourinchas also highlighted the precarious situation faced by emerging-market economies, saying that now is the time to “batten down the hatches.” Rising interest rates in the U.S. could prompt an outflow of capital from emerging markets, and a stronger U.S. dollar is already increasing debt-servicing costs for many heavily indebted countries.
“Too many low-income countries are in or close to debt distress. Progress toward orderly debt restructurings through the Group of Twenty’s Common Framework for the most affected is urgently needed to avert a wave of sovereign debt crisis. Time may soon be running out.”