IMF warns of slowing growth and rising market risks as finance chiefs meet

WASHINGTON, Oct 11 (Reuters) – The International Monetary Fund warned on Tuesday that the combined pressures of inflation, war-induced energy and food crises and sharply rising interest rates were pushing the world to the brink of recession. and threatened the stability of financial markets.

In somber reports released at the start of the first in-person annual meetings of the International Monetary Fund and World Bank in three years, the IMF urged central banks to continue their fight against inflation despite the pain caused by monetary tightening and the rise in the United States. dollar to its highest level in two decades, the two main drivers of a recent bout of volatility in financial markets.

Further cutting its global growth forecast for 2023, the IMF said in its World Economic Outlook that countries accounting for a third of global output could be in recession next year.

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“The three largest economies, the United States, China and the euro zone, will continue to stagnate,” Pierre-Olivier Gourinchas, chief economist of the IMF, said in a statement. “In short, the worst is yet to come, and for many people, 2023 will look like a recession.”

The IMF said global GDP growth next year will slow to 2.7%, from its July forecast of 2.9%, as rising interest rates slow the US economy, Europe is battling soaring gas prices and China is dealing with continued COVID-19 lockdowns and a weakening real estate sector.

The global lender maintained its 2022 growth forecast at 3.2%, reflecting stronger-than-expected production in Europe but weaker performance in the United States, after torrid global growth of 6.0% last year as the COVID-19 pandemic subsided.

Some key European economies will fall into “technical recession” next year, including Germany and Italy, as soaring energy prices and shortages dampen output. China’s growth outlook has also been downgraded as it grapples with continued COVID-19 lockdowns and a weakening real estate sector, where a deeper downturn would further dampen growth, the report said. IMF.

Growing economic pressures, coupled with tight liquidity, stubborn inflation and lingering financial vulnerabilities, are increasing the risks of disorderly asset revaluations and financial market contagion, the IMF said in its Global Financial Stability Report.

“It’s hard to think of a time when uncertainty was so high,” Tobias Adrian, IMF director for money and capital markets, told Reuters in an interview. “We have to go back decades to see so much conflict in the world, and at the same time inflation is extremely high.”

A man walks past the International Monetary Fund (IMF) logo at its headquarters in Washington, U.S., May 10, 2018. REUTERS/Yuri Gripas

This week, finance officials from the IMF’s 190 member countries grapple with these uncertainties related to differing economic positions in Washington, as well as the food and energy crises caused by the war in Ukraine and other global challenges, including massive clean energy financing needs.

PRIORITY: INFLATION

The IMF said central bankers have a delicate balance to fight inflation without over-tightening, which could plunge the global economy into an “unnecessarily deep recession” and cause economic hardship for emerging markets that are seeing their currencies fall sharply against the dollar.

But Gourinchas said controlling inflation was the biggest priority and that easing too quickly would undermine the “hard-won credibility” of central banks.

“What we’re recommending is that central banks stay the course. Now that doesn’t mean they have to speed up from what they’ve been doing,” Gourinchas told a news conference. , adding that it was “a bit early” for a change of course.

“I think our advice right now is, ‘let’s make sure we see a decisive drop in inflation’.”

The IMF expects headline consumer price inflation to peak at 9.5% in the third quarter of 2022, falling to 4.7% in the fourth quarter of 2023.

But the outlook could darken significantly if the global economy is hit by a “plausible combination of shocks”, including a spike in oil prices 30% from current levels, the IMF said, pushing global growth to 1.0% next year – a level associated with sharply declining real incomes.

Other elements of this “pessimistic scenario” include a sharp decline in investment in China’s real estate sector, a sharp tightening of financial conditions caused by the depreciation of emerging market currencies, and continued overheating in labor markets which translates into a decline in potential output.

The IMF estimated a 25% chance of global growth falling below 2% next year – a phenomenon that has happened only five times since 1970 – and said there was more than 10% chance of a contraction in global GDP.

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Reporting by David Lawder; Editing by Paul Simao

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