The global economy will feel like a recession next year, the IMF head warned on Thursday as the fund prepared to cut its economic forecast again.
Ahead of the fund’s and the World Bank’s annual meetings, Kristalina Georgieva said a third of the global economy would suffer at least two quarters of the economic contraction by 2023. Georgieva added that the combination of “shrinking real incomes and rising prices” would mean many other countries would feel they were in recession, even if they avoided an outright drop in output.
The comments indicate that the IMF will revise its economic forecasts again next week for the fourth consecutive quarter.
She blamed “multiple shocks” including the Russian invasion of Ukraine, high energy and food prices and continued inflationary pressures, saying growth was slowing in all of the world’s largest economies, causing “severe tensions in some places.” ” arose.
The situation would likely “worse rather than improve” in the near term, she said, in part because there are emerging financial stability risks in China’s real estate market, sovereign debt and illiquid assets. The near collapse of some UK pension funds last week following UK Chancellor Kwasi Kwarteng’s announcement of £45bn in unfunded tax cuts has raised concerns that low growth and higher borrowing costs will lead to market turmoil.
However, the IMF wants central banks to continue tightening monetary policy to deal with ongoing inflationary pressures and to ensure that rising prices do not become entrenched in corporate attitudes to their burdens and wages.
“Not tightening enough would cause inflation to loosen and become entrenched, requiring future interest rates to be much higher and more sustainable, causing massive damage to growth and massive harm to people,” Georgieva said.
She acknowledged, however, that it would be very difficult for monetary policymakers to assess the impact of their policies when they acted so quickly. Too many large rate hikes could lead to a “prolonged recession,” but the risk of doing too little was greater at this point, she said.
In an interview with CNBC later on Thursday, the IMF director said the task facing the US central bank was particularly challenging and described the path that Chairman Jay Powell must take as “very narrow”.
“If he doesn’t tighten enough, inflation can go off the anchor. If he tightens too much, there could be a recession,” she said, also pointing to the material impact of the Fed’s aggressive campaign to tighten monetary policy globally.
“The combination of a strong dollar and high interest rates is hitting emerging markets with weaker fundamentals and, practically across the board, low-income countries badly,” Georgieva warned. That would “inevitably” lead to defaults, as was already the case for Sri Lanka and Zambia, she added.
“Both official creditors and the private sector, please come together. Look at the music.”
Meanwhile, US Treasury Secretary Janet Yellen on Thursday pleaded with central banks, whose “main responsibility” is to restore price stability, to “recognize that macroeconomic tightening in advanced countries could have international spillovers.”
Without mentioning the UK or Germany, the chief executive took a hard look at their recently announced measures to tackle the high energy prices that shielded households and businesses from much of the price hikes.
The IMF has already publicly reprimanded the UK government for its generous energy aid and unfunded tax cuts. Georgieva’s speech revealed that the fund was in no mood to provide more nuanced advice ahead of Treasury ministers and central bankers’ visits to Washington next week.
She called for temporary and targeted support for vulnerable families, saying that “controlling prices for an extended period of time is neither affordable nor effective”.
She highlighted the inflationary risks of pumping too much money into the economy to protect households at a time when central banks raised interest rates to slow spending and push inflation back to low levels.
“While monetary policy is stepping on the brakes, you shouldn’t have fiscal policy stepping on the accelerator. This would make for a very rough and dangerous ride,” Georgieva said.
High food prices caused pain for households in emerging economies and an unsustainable debt crisis in many countries, she added. For countries in urgent need of food this winter, she offered a new “food shock” loan line, where countries can claim up to half of the money they pledged to the IMF.
The pain in the global economy would not last, she said, but a quick solution to the world’s economic problems would depend on cooperation, especially on food security, climate change and debt relief for the most vulnerable countries.
Also on Thursday, 140 civil society organizations called on the IMF to spend at least $650 billion in emergency aid through another allocation of its special drawing rights, a reserve asset.
“The vast majority of countries in the world are facing multiple historical, overlapping and generally worsening crises,” the organizations wrote in a joint letter to the multilateral lender. “The richest countries in the world must act quickly to help them.”