The global economy will feel like it is in recession next year, the head of the IMF warned on Thursday, as the fund prepared to downgrade its economic forecasts again.
Speaking ahead of the annual meetings of the fund and the World Bank, Kristalina Georgieva said a third of the world’s economy would suffer at least two quarters of 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 outright declines in output.
The remarks signal that the IMF is set to downgrade its economic forecasts again next week, for the fourth consecutive quarter.
Blaming “multiple shocks”, including Russia’s invasion of Ukraine, high energy and food prices, and persistent inflationary pressures, she said growth in all of the world’s largest economies was slowing down, leaving “severe strains” in some places.
The situation was “more likely to get worse than to get better” in the short term, she said, partly because there are emerging financial stability risks in China’s property market, in sovereign debt and in illiquid assets. The near collapse of some UK pension funds last week following UK chancellor Kwasi Kwarteng’s announcement of £45bn worth of unfunded tax cuts has sparked concerns that low growth and higher borrowing costs will trigger market turmoil.
However, the IMF wants central banks to continue to tighten monetary policy at pace to deal with the persistence of inflationary pressures and to ensure that rising prices do not become ingrained in company attitudes to their charges and wages.
“Not tightening enough would cause inflation to become de-anchored and entrenched, which would require future interest rates to be much higher and more sustained, causing massive harm on growth and massive harm on people,” said Georgieva.
She acknowledged, however, that it would be very difficult for monetary policymakers to judge the impact of their policies when they were moving in sync with each other so quickly. Too many big rate rises could lead to a “prolonged recession”, but the risk of doing too little was at present greater, she said.
In an interview with CNBC later on Thursday, the IMF’s managing director said the task confronting the US central bank was particularly challenging and described the path chair Jay Powell has to navigate as “very narrow”.
“If he doesn’t tighten enough, inflation may de-anchor. If he tightens too much, there could be a recession,” she said, also noting the material impact that the Federal Reserve’s aggressive campaign to tighten monetary policy was having globally.
“The combination of a strong dollar and high interest rates is hitting emerging markets with weaker fundamentals and, practically across the board, low-income countries quite significantly,” Georgieva warned. That would “inevitably” cause defaults, as had already been the case for Sri Lanka and Zambia, she added.
“Both official creditors and the private sector, please come together. Face the music.”
Meanwhile, Janet Yellen, the US Treasury secretary, on Thursday implored central banks, whose “prime responsibility” is to restore price stability, to “recognise that macroeconomic tightening in advanced countries can have international spillovers”.
Without naming the UK or Germany, the managing director took a swipe at their recently announced measures to tackle high energy prices that insulated households and companies from much of the rise in prices.
The IMF has already publicly rebuked the UK government for its generous energy support and unfunded tax cuts. Georgieva’s speech showed the fund was in no mood to offer more nuanced advice ahead of the visits of finance ministers and central bankers to Washington next week.
Calling for temporary and targeted support for vulnerable families, she said that “controlling prices for an extended period of time is not affordable, nor is it effective”.
She highlighted the inflationary risks of pumping too much money into the economy to protect households at a time when central banks were raising interest rates to slow spending and return inflation to low levels.
“While monetary policy is hitting the brakes, you shouldn’t have a fiscal policy that is stepping on the accelerator. This would make for a very rough and dangerous ride,” said Georgieva.
High food prices were causing pain for households in emerging economies and unsustainable debt crisis in many countries, she added. For countries with an urgent need for food this winter, she offered a new “food shock” borrowing line, where countries could claim up to half of the money they have pledged to the IMF.
The pain in the global economy would not be permanent, she said, but a speedy resolution of the world’s economic problems would depend on co-operation, especially on 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 $650bn in emergency aid through another allocation of its special drawing rights, a reserve asset.
“The great majority of the world’s countries are struggling amid multiple historic, overlapping, and generally worsening crises,” the organisations wrote in a joint letter to the multilateral lender. “The world’s wealthiest countries must act quickly to assist them.”