IMF chief issues gloomy assessment of global economy

The global economy will feel like it’s in recession next year, the head of the IMF warned Thursday as the fund prepared to cut its economic forecasts again.

Ahead of the annual fund and World Bank meetings, Kristalina Georgieva said that a third of the world economy will suffer at least two-quarters of the economic contraction in 2023. Georgieva added that the combination of “shrinking real incomes and rising prices” would mean many other countries would feel like they were in recession even if they avoided a direct drop in output.

The comments signal that the IMF will again downgrade its economic forecasts for the fourth straight quarter next week.

She blamed “multiple shocks” including Russia’s invasion of Ukraine, high energy and food prices and ongoing inflationary pressures, and she said growth in all of the world’s largest economies is slowing, leaving “severe strains” in some places.

The situation will “deteriorate rather than improve” in the short term, she said, in part because risks to financial stability are emerging in China’s real estate market, government bonds and illiquid assets. The near-collapse of some UK pension funds last week, following UK Chancellor Kwasi Kwarteng’s announcement that he would announce £45bn of unfunded tax cuts, has raised concerns that low growth and higher borrowing costs will trigger market turmoil.

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However, the IMF wants central banks to continue tightening monetary policy at a brisk pace to deal with ongoing inflationary pressures and to ensure that rising prices do not take hold in companies’ attitudes towards their fees and wages.

“Insufficient tightening would result in inflation being unanchored and stalled, which would require future interest rates that are much higher and more sustainable, causing massive damage to growth and people,” Georgieva said.

However, she acknowledged that it would be very difficult for monetary policymakers to assess the impact of their policies if they were coordinated so quickly. Too many big rate hikes could result in a “protracted recession,” but the risk of doing too little is greater right now, she said.

In an interview with CNBC later on Thursday, the IMF’s managing director said the task facing the Federal Reserve was particularly challenging, describing the path Chair Jay Powell had to walk as “very tight”. .

“If it doesn’t tighten enough, inflation could die down. If it picks up too much, there could be a recession,” she said, also noting the material impact of the Federal Reserve’s aggressive monetary tightening campaign has had around the world.

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“The combination of a strong dollar and high interest rates is hitting emerging markets with weaker fundamentals and almost universally low-income countries quite badly,” Georgieva warned. That would “inevitably” lead to defaults, as has already happened for Sri Lanka and Zambia, she added.

“Both official creditors and the private sector, please come together. Face the music.”

Meanwhile, US Treasury Secretary Janet Yellen on Thursday implored central banks, whose “primary responsibility” is to restore price stability, to “recognize that macroeconomic tightening in advanced economies may have international implications.”

Without naming Britain or Germany, the chief executive took a swipe at the recently announced measures to combat high energy prices, which have shielded homes and businesses from much of the price hike.

The IMF has already publicly censured the UK government for its generous energy support and unfunded tax cuts. Georgieva’s speech indicated that the fund was in no mood to offer more nuanced advice ahead of next week’s visits to Washington by finance ministers and central bankers.

Calling for temporary and targeted support for vulnerable families, she said “prolonged price control is neither affordable nor effective”.

She highlighted the inflationary risks of injecting too much money into the economy to protect households while central banks hike interest rates to slow spending and keep inflation low.

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“While monetary policy is hitting the brakes, you shouldn’t have fiscal policy hitting the gas pedal. It would make for a very rough and dangerous ride,” said Georgieva.

High food prices are causing pain to emerging market households and an unsustainable debt crisis in many countries, she added. For countries in dire need of food this winter, it offered a new “food shock” line of credit, under which countries could draw up to half the money they had pledged to the IMF.

The pain in the global economy would not last, she said, but a quick solution to the world’s economic problems would depend on working together, particularly food security, climate change and debt relief for the most vulnerable countries.

Also on Thursday, 140 civil society groups called on the IMF to issue at least $650 billion in emergency aid through a further allocation of its Special Drawing Rights, a reserve asset.

“The vast majority of countries around the world are struggling in the midst of multiple historic, overlapping and generally worsening crises,” the organizations wrote in a joint letter to the multilateral lender. “The richest countries in the world must act quickly to help them.”

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