The usual bustle of delegates, speakers, guests and journalists returns to the headquarters of the International Monetary Fund (IMF) and the World Bank three years later. From the repetition of the routines, it seems like it was yesterday. However, these three years have shaken the economy in a way that has not happened since World War II. And now it is another war, the one in Ukraine, which has frustrated the post-pandemic recovery and put the world economy in check.
The managing director of the IMF, Kristalina Georgieva, advanced it last week. The Fund had decided to once again lower its growth forecast for 2023. This Tuesday, the Fund’s economic adviser, Pierre-Olivier Gourinchas, has put figures on it. According to his estimates, the world product will grow only 2.7% in 2023. If the falls of 2009 (the year of the Great Recession) and 2020 (the year of the pandemic) are excepted, it is the weakest growth since 2001 .
The slowdown will be felt above all in the United States, Europe and Latin America. China will still grow well below its potential, but somewhat more than this year, in which the confinements and restrictions due to the outbreak of the covid, plus its problems in the real estate sector, have weighed down its economy. Around the world, moreover, the rise in the prices of energy, raw materials and food have unleashed inflation, which hits the poorest especially hard.
“The global economy continues to face major challenges, conditioned by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and rising inflationary pressures, and the slowdown in China,” he summarizes. Gourinchas, who adds: “The worst is yet to come, and for many people 2023 will feel like a recession.”
“The Russian invasion of Ukraine continues to powerfully destabilize the world economy,” says the Fund’s economist. “Beyond the increasing and senseless destruction of lives and livelihoods, it has caused a serious energy crisis in Europe that is dramatically increasing the cost of living and hampering economic activity,” he explains.
In addition, the war has also increased food prices on world markets, causing severe hardship for households around the world, and especially in low-income countries.
Faced with high inflation, central banks have tightened their monetary policies, led by the US Federal Reserve. The IMF examines its conscience and admits that it was wrong to think that inflation would be transitory. Now his message is the opposite: although it will peak in the final stretch of this year, it will continue to be high longer than expected and will drop to 4.1% already in 2024. The tightening of monetary policies will slow down the economy and as pointed out by the Fed Chairman Jerome Powell will cause “some pain for families and businesses.”
Calibrate monetary policy
Controlling inflation is essential, admits the Fund. But getting it right when calibrating the measurements is also. Insufficient tightening would further entrench the inflation process, erode the credibility of central banks and de-anchor inflation expectations, explains Gourinchas, who warns: “As history repeatedly teaches us, this would only increase the final cost of bringing inflation down. control”. On the other hand, excessive tightening “risks pushing the global economy into an unnecessarily harsh recession.” For now, the big central banks are sending the message that they would rather go over than go short. The IMF also seems to opt for that option.
The Fund claims to keep the rudder firm before the storm clouds. That also applies to those responsible for fiscal policy. Georgieva put it graphically: they must not step on the gas while monetary policy is on the brakes. The recipes are fiscal responsibility, no tax cuts or general aid and support for the most vulnerable. Gorinchas warns: “The energy crisis, especially in Europe, is not a transitory shock. The geopolitical readjustment of energy supplies following Russia’s war against Ukraine is extensive and permanent. The winter of 2022 will be difficult for Europe, but the winter of 2023 will probably be worse.
The energy crisis, rate hikes and the safe-haven nature of the dollar have caused the US currency to appreciate against other currencies, putting emerging countries in difficulties, above all. If there is also financial instability or a debt crisis, the dollar can appreciate even more, he warns.
Slowdown in Europe and the United States
In this world of uncertainty and volatility, advanced economies will grow only 1.1%, compared to 2.4% this year and 5.2% last year. The United States has already suffered the slowdown this year, going from 5.7% to 1.6%, without year-on-year growth in the fourth quarter of the year. In 2023, the economy will only advance 1.0%.
The euro zone resists better this year, in which it will grow by 3.1%, in part due to the upturn in tourism in Spain and Italy, but it will stop dead in 2023 to a rate of only 0.5% and with Italy (- 0.3%) and Germany (-0.2%) in negative. According to the Fund, Spain will be in the upper middle zone of the table, with 1.2%, far from the Government’s forecast of 2.1%.
For the United Kingdom, the forecast was for a bump in growth, going from 3.6% to 0.3%, but it was made before the announcement of the government’s stimulus plan. The IMF believes that the effect of this partially revised package may be a more dynamic economy, but at the cost of higher inflation.
As in China the most abrupt slowdown has already occurred this year, with an increase of only 3.2% of GDP, the forecast is that it will accelerate to 4.9% if the real estate crisis and the battle against the covid. With China, the rest of Asia is also avoiding the slowdown.
In contrast, in Latin America, growth in 2023 will be 1.7%, half that of this year. Chile and Colombia, which have inaugurated leftist presidents in 2022, are losing economic steam, but the slowdown also extends to Brazil, Mexico, Argentina and almost the entire region.
The IMF sees a 25% chance that global growth will be less than 2%. The list of risks that can make things worse is long, according to the Fund. It includes possible errors in monetary policy, new shocks in energy and food prices, lack of energy supply in Europe, debt problems in emerging countries, a resurgence of covid or new health problems, a worsening of the Chinese real estate crisis.