MNI: IMF Sees 'Prominent' Global Recession Risk Next Year

Global economic growth will weaken significantly in the second half of this year and faces a "particularly prominent" risk of recession in 2023 as central banks tighten monetary policy to fight stubborn inflation, the IMF said Tuesday.

China and the U.S. led fresh growth markdowns on slower American consumer spending and Beijing's tough Covid policies. The update to April's World Economic Outlook titled "Gloomy and Uncertain" also said Europe faces major risks from the Ukraine war including shutdowns of Russian oil and gas shipments.

"The outlook has darkened significantly," IMF Research Director Pierre-Olivier Gourinchas wrote in a blog post released along with the report. "The world may soon be teetering on the edge of a global recession, only two years after the last one."

The Fund boosted global inflation projections 0.9pp this year and next to 8.3% and 5.7% respectively, even with central banks jacking up borrowing costs. The global economy should still grow about 3% this year and next, even after further reductions of 0.4pp and 0.7pp respectively, with the IMF warning that baseline still isn't safe from recession or stagflation.

OVERWHELMING DOWNSIDE RISKS

"Projections for growth on a fourth-quarter-over-fourth-quarter basis point to a significant weakening of activity in the second half of 2022," according to the Outlook, which used the word recession 13 times in 18 pages.

"The risk of recession is particularly prominent in 2023, when in several economies growth is expected to bottom out, household savings accumulated during the pandemic will have declined, and even small shocks could cause economies to stall," the report said.

Risks are "overwhelmingly tilted to the downside" and include the Ukraine war, stubborn inflation, financial market instability as rates rise, more Covid outbreaks and geopolitical fragmentation, the IMF said. One specific scenario showed growth next year could easily slip to 2%, one of the worst showings since 1970. Global output probably also shrank in the second quarter of this year, the IMF said.

"The slowdown in China has global consequences: lockdowns added to global supply chain disruptions and the decline in domestic spending are reducing demand for goods and services from China’s trade partners," the IMF said. China's growth this year of 3.3% will be the slowest in more than four decades, apart from the onset of Covid.

WHIP INFLATION FIRST

Central banks must focus on curbing inflation and let fiscal policy tackle specific policies to help struggling families, the IMF said. "Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them," the report said.

The IMF also admitted its inflation forecasts missed the mark and said the latest projections are based on several difficult assumptions around the Ukraine war and how financial markets react to central bank tightening.