New data released by the International Monetary Fund (IMF) as part of its flagship World Economic Outlook (WEO) report shows the world economy facing increasingly precarious times ahead. It cut the global growth forecast by 0.3 percentage points to 3.2 percent compared to its April WEO projections.
"The global economy, still reeling from the pandemic and Russia's invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook", said new IMF Chief Economist Pierre-Olivier Gourinchas in his blog, adding that all risks flagged by the IMF in April have begun to materialise, said the report titled 'Gloomy and More Uncertain.'
"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", he adds, referring to the set of global recessions bought on by the first wave of the COVID-19 pandemic that saw a series of lockdowns as public health measures.
The world's three largest collective economies - the United States, China and the European Union - have all seen their growth projection downgraded compared to April. The United States will grow 2.3 percent in 2022, a downgrade of 1.4 percentage point (140 basis points) since April and just 1 percent in 2023, a downgrade of 1.3 percentage points since April. It mentions that in the United States, a technical recession (that's two successive quarters of GDP contraction) may have already started according to local indicators.
China will grow 3.3 percent in 2022, a downgrade of 1.1 percentage points since April. The Euro area has a seen a major downgrade for 2023 where it will barely grow at 1.2 percent as the aftershocks of the Russia-Ukraine conflict start setting in. Major economies within it, like Germany, Italy and France, will either grow 1 percent or below it.
India too has witnessed a downgrade of 0.8 percentage points since April, and is now expected to grow 7.4 percent in financial year 2023 (April 2022 to March 2023). For India, the revision reflects mainly less favorable external conditions and more rapid policy tightening", the report says.
The report spells out the exact risks that threaten to plunge the global economy in a potential recession.
First, the war in Ukraine could stop gas flows from Russia. The IMF has modelled for an extreme scenario where gas from Russia is totally shutdown. In such a case, the United States and the Euro area will see near zero growth with devastating consequences for the world. Inflation too remains a concern due to hot labour markets and high inflation expectations. Further, rising food and fuel prices could lead to social unrest and food insecurity.
As interest rates rise to corner inflation, the IMF signals that debt could become distressing in emerging economies and the developing world.
The IMF also does not rule out fresh COVID-19 case outbreaks, that could impact China's growth. China still follows a 'zero-COVID' policy, with Shanghai seeing several lockdowns this year to combat rise in cases.
Finally, it says that global fragmentation could inhibit global trade.
The report and data can be found here, and the blog here.
