IMF expects global economy to slow further

Global growth is expected to slow further next year, the IMF said on Tuesday, downgrading its forecasts as countries grapple with the fallout from Russia's invasion of Ukraine, spiralling cost-of-living and economic downturns.

The world economy has been dealt multiple blows, with war in Ukraine driving up food and energy prices following the coronavirus outbreak while soaring costs and rising interest rates threaten to reverberate around the globe.

"This year's shocks will re-open economic wounds that were only partially healed post-pandemic," said International Monetary Fund economic counsellor Pierre-Olivier Gourinchas, in a blog post accompanying the fund's latest World Economic Outlook.

More than a third of the global economy is headed for contraction this year or next, and the three biggest economies — the United States, European Union and China — will continue to stall, he warned.

In its report, the IMF trimmed its 2023 global GDP forecast to 2.7%, 0.2 points down from July expectations.

Its world growth forecast for this year remains unchanged at 3.2%.

The global growth profile is its "weakest" since 2001, apart from during the global financial crisis and the worst of the pandemic, said the IMF.

This reflects slowdowns for the biggest economies, including a US GDP contraction in the first half of 2022 and virus lockdowns in China on top of a property market crisis.

Laser focus

A key factor behind the slowdown is a shift in policy as central banks try to bring down soaring inflation, with higher interest rates starting to take the heat out of domestic demand.

Growing price pressures are the most immediate threat to prosperity, said Gourinchas in the report, adding that central banks are now "laser-focused on restoring price stability".

Global inflation is expected to peak at 9.5% this year before dropping to 4.1% by 2024.

But misjudging the persistence of inflation could prove detrimental to future macroeconomic stability, he warned, "by gravely undermining the hard-won credibility of central banks."

While current challenges do not mean a large downturn is inevitable, the fund also warned many low-income countries are either in, or close to debt distress.

Progress toward debt restructurings for the hardest-hit is needed to avoid a wave of sovereign debt crisis.

"Time may soon be running out," said Gourinchas.

US slowdown

The IMF has cut forecasts for the two biggest economies, United States and China, as well.

US economic growth is pegged at 1.6% this year, 0.7 points below the fund's July forecast, due to an unexpected contraction this year.

"Declining real disposable income continues to eat into consumer demand, and higher interest rates are taking an important toll on spending," the IMF said.

The Federal Reserve has been raising interest rates aggressively to tamp down surging inflation, which is slowing economic activity. And the central bank has said more increases are likely to come.

A slowdown in the Euro area is expected to deepen next year, said the IMF, and growth in China is projected to hit its lowest rate in decades -- apart from during the initial coronavirus outbreak.

China's economy is expected to grow 3.2% this year, slightly lower than originally forecast.

The fund cautioned that a worsening of China's property sector slump could spill over to the domestic banking sector and weigh heavily on growth.-Fin24