Deniz Kılınç / Istanbul, October 12 (HNA) – The International Monetary Fund (IMF) warned on Tuesday of one-third of the world economy would “likely contract this year or next” amid shrinking “real incomes” and “rising prices” warning that, “storm clouds” are looming over the global economy, including persistent inflation, a slowdown in China and ongoing stresses from Russia’s invasion of Ukraine which have driven up the risk of a severe downturn to levels not seen since the onset of the Covid-19 pandemic.
In its latest Global Financial Stability Report, the IMF warned that global financial stability risks had increased since the April 2022 edition, leaving the balance of risks “significantly skewed” to the downside.
“The global environment is fragile with storm clouds on the horizon,” the report stated and added:
“The global economy continues to face steep challenges, shaped by the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.
“Our global growth forecast for this year is unchanged at 3.2 percent, while our projection for next year is lowered to 2.7 percent—0.2 percentage points lower than the July forecast. The 2023 slowdown will be broad-based, with countries accounting for about one-third of the global economy poised to contract this year or next.
“The three largest economies, the United States, China, and the euro area will continue to stall. Overall, this year’s shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession.”
Lingering market vulnerabilities, tightening liquidity, stubborn inflation and ongoing efforts by central banks worldwide to raise rates to combat it have combined to create a volatile and risky environment, the report stated.
“Despite the economic slowdown” inflation pressures are proving broader and more persistent than anticipated, according to the report, while global inflation is expected to peak at 9.5 percent this year before decelerating to 4.1 percent by 2024.
“Inflation is also broadening well beyond food and energy. Global core inflation rose from an annualized monthly rate of 4.2 percent at end-2021 to 6.7 percent in July for the median country” read the report.
In the IMF report, which emphasized that structural reforms could support the fight against inflation by increasing efficiency and relieving supply problems, it was predicted that Turkey would grow by 5.0 percent this year and 3.0 percent next year. In the update released by the IMF in July, it was predicted that the Turkish economy would grow by 4.0 percent this year and 3.5 percent in 2023.
Downside risks to the outlook remain elevated, while policy trade-offs to address the cost-of-living crisis have become more challenging. Among the ones highlighted in the report are:
“The risk of monetary, fiscal, or financial policy miscalibration has risen sharply amid high uncertainty and growing fragilities.
“Global financial conditions could deteriorate, and the dollar strengthens further, should turmoil in financial markets erupt, pushing investors towards safe assets. This would add significantly to inflation pressures and financial fragilities in the rest of the world, especially in emerging markets and developing economies.
“Inflation could, yet again, prove more persistent, especially if labour markets remain extremely tight.
“Finally, the war in Ukraine is still raging and further escalation can exacerbate the energy crisis.”
IMF’s latest outlook also assesses the risks around our baseline projections, estimating that there is about a one in four probability that global growth next year could fall below the historically low level of 2.0 percent.
“If any of the risks materialize, global growth would decline to 1.1 percent with quasi-stagnant income-per-capita in 2023. According to our calculations, the likelihood of such an adverse outcome, or worse, is 10 percent to 15 percent” read the report.
Increasing price pressures remain the most immediate threat to current and future prosperity by squeezing real incomes and undermining macroeconomic stability. Central banks are now laser-focused on restoring price stability, and the pace of tightening has accelerated sharply, stated the report, and went on as follows:
“There are risks of both under- and over-tightening. Under-tightening would further entrench inflation, erode the credibility of central banks, and de-anchor inflation expectations. As history teaches us, this would only increase the eventual cost of bringing inflation under control.
“Over-tightening risks pushing the global economy into an unnecessarily severe recession. Financial markets may also struggle with overly rapid tightening. Yet, the costs of these policy mistakes are not symmetric.
“The hard-won credibility of central banks could be undermined if they misjudge yet again the stubborn persistence of inflation. This would prove much more detrimental to future macroeconomic stability.
“Where necessary, financial policy should ensure that markets remain stable. However, central banks need to keep a steady hand with monetary policy firmly focused on taming inflation.”