A third of the world economy will be in recession this year and even those countries that avoid an official downturn will feel the strain, the head of the International Monetary Fund has warned.
Kristalina Georgieva said “this is going to be a tough year, tougher than the year we leave behind, because the three big economies, the US, the EU and China are all slowing down simultaneously.”
Of the three, the US was most “resilient”, she said, and might avoid recession because of low rates of unemployment, whereas half of the EU would experience one this year.
Emerging economies would be even harder hit because as interest rates and the dollar rise, so does the cost of imports and repaying their debt, she told CBS’s Face the Nation.
Although those countries in distress are not yet significant enough to trigger a debt crisis, she said if the list continued to grow: “The world economy may be in for a bad surprise”.
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Her warnings come as little surprise given the cumulative effects of the cost of living crisis, Russia’s invasion of Ukraine and the lingering impact of the pandemic.
These factors led IMF economists to cut their predictions for global growth in October, forecasting it would slow from 6 per cent in 2021 to 3.2 per cent in 2022 and 2.7 per cent in 2023.
This would be the weakest level since 2001, with the exception of the global financial crisis and the worst phases of the pandemic.
Georgieva explained this figure could be even lower if central banks stop their attempts to bring down inflation by raising interest rates and suggests that the IMF’s next economic forecasts, due at the end of January, could be even weaker. “Our message to central banks is, ‘You have to see credible decline in inflation and only then can you think about recalibrating rate policy’.”
While China used to make up almost 40 per cent of global economic growth, Georgieva said, it also faced a difficult start to the year.
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The world’s second largest economy has been buffeted by Covid, first by stringent lockdowns, which stifled businesses and consumer spending and now by the lifting of restrictions, which has led to a resurgence in cases, coupled with an ineffective vaccination programme.
The country’s struggles have had a knock-on effect on the rest of the world, especially on Asian economies.
“For the first time in 40 years China’s growth in 2022 is likely to be at or below global growth. That has never happened before. The expectation we have for China is to gradually move to a higher level of economic performance, and finish the year better off,” she said.
The latest Chinese GDP figures, issued by its government on Monday, reported the country grew about 4.4 per cent last year. In 2021 growth was 8.1 per cent while before the pandemic, in 2019, it was about 6 per cent.
Another economic drag is the growing political and economic fault lines between the US and China which have led to cuts to trade, most recently with US ban on Chinese imports of advanced semiconductors in September and the people who know how to make them.
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Georgieva warned that although Covid’s disruption to global trade had shown countries the importance of securing homegrown supplies and of national security, and that some protectionism was necessary, splitting the world into two blocks of east and west would cut $1.5 trillion from global GDP each year.
“We have to be careful not to throw the baby out with the bath water. Yes, the way we have operated created excessive dependency in global chains. We have to think of the security of supplies and that means diversifying the sources of products that make the economy function well. That economic logic is not only appropriate, it is a must. But we shouldn’t go beyond that because the costs are very, very high.”
One bright spot for 2023 was an expected drop in inflation to below 6.5 per cent by the end of the year, she said, “provided central banks stayed the course”.
With 190 member countries, the IMF was established in the aftermath of the Great Depression of the 1930s and works to stabilise the world’s economy by monitoring it, issuing advice to governments and providing loans to struggling countries.
