World may soon be on edge of recession


Gourinchas also said the synchronised tightening of monetary policy across countries would hurt growth, but it was a bitter pill that must be swallowed to tame inflation.

The risks to the global growth outlook are “overwhelmingly tilted to the downside” and the world could soon be on the brink of a recession, the International Monetary Fund’s (IMF) top economist, Pierre-Olivier Gourinchas, has warned. “The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one,” Gourinchas wrote on July 26 in an article accompanying the release of an update to the IMF’s World Economic Outlook report.

In the latest update to its outlook report, the IMF cut its global growth forecast for 2022 by 40 basis points to 3.2 percent and by 70 basis points to 2.9 percent for 2023. While the above is the IMF’s base case, in an alternative scenario where some risks materialise – such as no supply of Russian gas to Europe – global growth will fall further to about 2.6 percent in 2022 and 2 percent in 2023 – levels that have been undershot just five times since 1970, Gourinchas said.

“Under this scenario, both the United States and the euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world,” he added. The US is expected to soon fall into what is colloquially called a technical recession – two consecutive quarters of contraction in GDP. Data released earlier this year showed the US economy contracted by 1.6 percent in January-March. The Federal Reserve Bank of Atlanta’s ‘GDPNow’ forecast currently estimates US GDP likely shrunk by 1.6 percent in April-June.

Inflation threat

Even as growth is slowing down, the threat of high inflation remains, with the IMF even going on to raise its inflation forecast because of risks from food and fuel prices. As per the agency, global consumer price inflation is seen averaging 8.3 percent in 2022, up from the 7.4 percent forecast in April. In 2023, consumer inflation is seen easing sharply to 5.7 percent – also 90 basis points higher than what was forecast in April. “Inflation at current levels represents a clear risk for current and future macroeconomic stability and bringing it back to central bank targets should be the top priority for policymakers. In response to incoming data, central banks of major advanced economies are withdrawing monetary support faster than we expected in April, while many in emerging market and developing economies had already started raising interest rates last year,” Gourinchas said.

Russia’s invasion of Ukraine in late February disrupted supplies of crucial commodities, pushing up prices globally. Consequently, key central banks in the developed world, such as the US Federal Reserve, have begun tightening their monetary policies in earnest to cut down multi-decade high inflation. Gourinchas said the synchronised tightening of monetary policy across countries is “unprecedented” and it would hurt growth, although that was a bitter pill that must be swallowed. “Tighter monetary policy will inevitably have real economic costs, but delaying it will only exacerbate the hardship. Central banks that have started tightening should stay the course until inflation is tamed,” he argued.

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Published On: July 26th 2022
Author: Siddharth Upasani
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