The IMF's quarterly data dispatch indicates that the global economy is facing a knife-at-the-throat situation. Its World Economic Outlook (WEO) released on Tuesday threw us several disappointing details.
First, global growth contracted in the second quarter ending June. This, in turn, has knocked off annual growth prospects, which the multi-lateral agency has dutifully revised downwards for both 2022 and 2023 for all countries, sparing just a handful. Though central banks are going after inflation with their triple-barreled guns, the IMF confirmed that prices will remain elevated longer than anticipated. Lastly, and the most dreadful of all, it concluded that the economic outlook has darkened so much that 'the world may soon be teetering on the edge of a global recession' -- just two years after we barely survived the last one in 2020.
These grim details come two days ahead of the official GDP data release in the US, the world's largest economy, which is said to have already entered a technical recession. Also adding unnecessary trouble is China, whose slowing economy is worsening global trade and deepening supply chain disruptions.
Considering the unending economic uncertainities, the IMF has cut global growth to 3.2% and 2.9% in 2022 and 2023 respectively -- 0.4% and 0.7% lower than its April estimates. In 2021, growth stood at 6.1%.
India's growth too was revised down by 0.8% to 7.4%, reflecting less favorable external conditions and more rapid policy tightening.
The primary culprits driving downward revisions include the world's leading economies -- the US, China, the euro area and, of course, India -- which are witnessing sharper slowdowns due to extended lockdowns in China (affecting trade), tightening financial conditions, steeper interest rate hikes, persistent inflation, and spillovers from the Ukraine war.
The IMF, however, noted that with the estimated growth of 3% in 2022–23, a decline in global GDP or in global GDP per capita -- sometimes associated with global recession -- was not currently part of its baseline scenario. However, it added that growth projections point to a significant weakening of activity in the second half of 2022.
It underscored concerns about an oncoming recession were piling by the day. For example, the probability of a recession starting in G-7 economies was estimated to be nearly 15% -- four times its usual level -- and nearer one in four in Germany. For the US, some indicators, such as the Federal Reserve Bank of Atlanta's GDPNow forecasting model, suggest that a technical recession (defined as two consecutive quarters of negative growth) is already underway. "The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession," noted IMF's Pierre-Olivier Gourinchas in a blogpost.
With global output contracting in Q2, growth revisions were mostly negative for advanced economies, but were mixed for emerging markets. While growth in the US was revised down to 2.3% and 1% in 2022 and 2023 respectively, owing to reduced household purchasing power and tighter monetary policy, growth in the euro area too was revised down to 2.6% and 1.2% in 2022 and 2023 respectively.
On the other hand, the revision in emerging and developing Asia is at 0.8%, including a 1.1% downgrade to China's growth at 3.3% -- the slowest in over four decades, excluding the pandemic year.
The only upshot, is countries like Latin America and the Caribbean that saw an upward revision of 0.5% in 2022 due to robust recovery in the large economies (Brazil, Mexico, Colombia, Chile). Likewise, the outlook for countries in the Middle East and Central Asia and sub-Saharan Africa remain on average unchanged or positive.
As for price rise, the IMF made no bones about the fact that inflation is here to stay. Its baseline projections for global inflation are pessimistic, having been revised up to 8.3% in 2022, from 6.9% projected in April. While emerging market and developing economies inflation may reach 10%, the revision is larger for advanced economies at 6.3% from 4.8%. This is due to significant price rise in major economies like the UK (2.7% upward revision to 10.5%) and the euro area (2.9% upward revision to 7.3%).
That said, forecasts for 2023 were relatively unchanged, perhaps reflecting confidence that inflation will decline as central banks tighten policies and energy price base effects turn negative. But the IMF also cautioned that tighter monetary policy will inevitably have real economic costs, though any delay will only exacerbate them.
The bottomline is, growth risks are overwhelmingly tilted to the downside. So the IMF made projections picturing a plausbile alternative scenario and it's findings aren't pretty at all.
Should the war in Ukraine cut off European gas imports from Russia or should inflation remains stickier than anticipated, or should tighter global financial conditions induce debt distress in emerging markets, or if there are renewed COVID-19 outbreaks and lockdowns impeding growth and trade, and if such risks materialize, then global growth may well decline to 2.6% and 2% in 2022 and 2023, respectively, putting growth in the bottom 10% of outcomes since 1970!