Global economy may soon be teetering on the edge of a recession—IMF

The global economy is facing the possibility of a severe downturn that would rank in the bottom 10% of outcomes since 1970, the International Monetary Fund warned Tuesday in an update to its closely-followed World Economic Outlook report. “The outlook has darkened significantly April. The world may soon be teetering on the edge of a global recession” said Pierre-Olivier Gourinchas, the IMF’s chief economist, in a blog post accompanying the report. The IMF said global output contracted in April-June quarter owing to downturns in China and Russia while U.S. consumer spending “undershot” expectations.

The global economy is reeling from the war in Ukraine, COVID-lockdowns in China, and soaring inflation pressures in the United States and Europe. The IMF trimmed its baseline forecast for global economic growth to 3.2% in 2022, 0.4 percentage point lower than in the April report. In 2023, the IMF projected global output at just 2.9%. For the U.S., the IMF is projecting 2.3% growth this year, down 1.4 percentage points from the April forecast. For 2023, the IMF is now projecting a slim 1% growth rate, down 1.3 percentage points from April. The IMF cut its forecast for China by 1.1 percentage points to 3.3% this year. This is having “major global spillovers.” Growth in China is expected to rebound to a 4.6% rate next year.

However, the IMF also warned there was a “plausible alternative scenario” of a severe global downturn, where global growth declines to about 2.6% this year and 2% in 2023. The risk of recession is particularly acute in 2023, the report said. Despite the gloom about the outlook for growth, the IMF said taming inflation should be the first priority for policymakers. “Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them,” the IMF said. Fiscal policy is also handcuffed, with the need for a “disinflationary overall macroeconomic policy.” Governments should focus on helping cushion the impact for the most vulnerable. Inflation is expected to return to pre-pandemic levels by the end of 2024. The IMF passed on the question of the exact amount of policy required to lower inflation. MW