IMF: Inflation, higher rates stifle economic development

Global economic growth is projected to slow from the 6 percent of 2021 to 3.2 percent in 2022, and 2.7 percent in 2023, when there is also a chance of it falling below 2 percent, according to the International Monetary Fund's World Economic Outlook, released on Tuesday.

The quarterly report said that the sharpest economic activity slowdown in 80 years has been shaped by the highest inflation in decades, tightening financial conditions in most regions, the conflict in Ukraine and the lingering COVID-19 pandemic.

The forecast for 2023 is 0.2 percentage point lower than the July forecast, the weakest rate since the 2.5 percent growth during the global slowdown of 2001 — with the exception of the growth rates during the global financial crisis in 2008 and COVID-19 crisis in 2020.

In a discussion on Monday with World Bank Group President David Malpass, IMF Managing Director Kristalina Georgieva said the risk of recession has gone up.

The weeklong annual meetings of the IMF and World Bank, which started on Monday, are being held in person in Washington for the first time since the pandemic started.

"We have calculated that the equivalent of about one-third of the world economy would have at least two consecutive quarters of negative growth this year and next year, and that the total amount that would be wiped out by the slowdown of the world economy is going to be, between now and 2026, $4 trillion," Georgieva said.

That is the size of Germany's gross domestic product gone, she said.

The IMF report said that, for many emerging markets and developing economies, the sharp appreciation of the US dollar adds significant domestic price pressures and to the cost-of-living crisis.

Georgieva said that strong action is needed to contain global inflation, which is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022, but to decline to 6.5 percent in 2023.

"We have to think of the strong dollar that comes with the tightening of financial conditions and how it impacts developing countries," she said.

Malpass said that currency depreciation will make debt levels for developing countries more burdensome, and the rise in interest rates adds to that pressure. Inflation is still a major problem for everyone, but especially for the poor, he said.

In a poverty report released last week, the World Bank estimated that the pandemic pushed about 70 million people into extreme poverty in 2020, the largest one-year increase since global poverty monitoring began in 1990.

"So, as we think about our goal of shared prosperity, it's not happening. There are reversals going on in development," he said.

Malpass said that the advanced economies are taking a lot of the world's capital in the form of fiscal deficits, by heavy borrowing by big corporations and by the central banks themselves, buying only the bonds of the very advanced countries, which puts a strain on development from the macro side.

The three largest economies, the United States, China and the eurozone, will continue to stall, Pierre-Olivier Gourinchas, the economic counselor and director of research for the IMF, wrote in a blog published on Tuesday.

The IMF foresees China's overall GDP growth aligning with the global projected pace in 2022, but it is expected to rise to 4.4 percent in 2023. The revisions are 0.1 and 0.2 percentage point lower than projected in July.

Growth in the US is forecast to decline from 5.7 percent in 2021 to 1.6 percent in 2022 and 1 percent in 2023, with the fourth quarter of showing no year-on-year growth.

US growth in 2022 has been revised down by 0.7 percentage point since July, reflecting the unexpected real GDP contraction in the second quarter, the IMF report said.

The slowdown is most pronounced in the eurozone, where the energy crisis, following the conflict in Ukraine, will continue to take a heavy toll, reducing growth to 0.5 percent in 2023.

"Overall, this year's shocks will reopen economic wounds that were only partially healed post-pandemic," Gourinchas wrote. "The worst is yet to come and, for many people, 2023 will feel like a recession."

Steering clear of the risks starts with monetary policy staying the course to restore price stability, the IMF report suggested.

The priority in fiscal policy is protecting vulnerable groups through targeted near-term support to alleviate the burden of the cost-of-living crisis felt across the globe. But its overall stance should remain sufficiently tight to keep monetary policy on target, the report said.

In addition, policies to fast-track the green energy transition will yield long-term payoffs for energy security and the costs of ongoing climate change, it said.

In conclusion, it said, successful multilateral cooperation will prevent fragmentation that could otherwise reverse gains in the economic well-being from 30 years of economic integration.