The International Monetary Fund's managing director has warned of rising recession risks as the lender downgrades its growth forecast for next year and expects a global output loss of about $4 trillion between now and 2026.
“In less than three years we lived through shock, after shock, after shock,” Kristalina Georgieva said in a speech at Georgetown University in Washington on Thursday, ahead of the IMF-World Bank annual meetings in the US capital this month.
Ms Georgieva cited the Covid-19 pandemic, Russia's war in Ukraine and climate disasters that have exacerbated inflationary pressures and led to food and energy prices soaring, causing a cost-of-living crisis.
“Most economists, including at the IMF, thought the recovery would continue, and inflation would quickly subside — largely because we expected vaccines would help tame supply side disruptions and allow production to rebound,” Ms Georgieva said.
“But this is not what happened. Multiple shocks, among them a senseless war, changed the economic picture completely. Far from being transitory, inflation has become more persistent.”
Inflation reached a four-decade high in the US and UK earlier this year, and hit a record in Europe as well.
In July, the IMF said Russia’s war in Ukraine, rising inflation and a slowdown in China had derailed the momentum of the global economy's recovery from the Covid-19 pandemic, prompting it to lower its growth forecast to 3.2 per cent in 2022 and 2.9 per cent in 2023 after a 6.1 per cent expansion last year.
Ms Georgieva said the coming World Economic Outlook of the fund that will be released next week downgrades growth figures for next year.
This is largely due to “the darkening global outlook” as the economy faces greater uncertainty, higher volatility, tighter financial conditions, geopolitics and natural disasters.
The US and China, the world's two largest economies, and the euro area countries are all slowing down, which will reverberate across emerging and developing countries as they face reduced demand for their exports. Many of these countries may feel severe strains from higher food and energy prices.
“The risks of recession are rising. We estimate that countries accounting for about one-third of the world economy will experience at least two consecutive quarters of contraction this or next year,” Ms Georgieva said.
And, even when growth is positive, it will feel like a recession because of shrinking real incomes and rising prices.”
The IMF expects a global output loss of about $4tn between now and 2026, equivalent to the size of the German economy — Europe's largest.
That is “a massive setback for the world economy. And it is more likely to get worse than to get better,” Ms Georgieva said.
Risks to financial stability are rising, which could be amplified by pre-existing vulnerabilities, which include high debt levels of countries and concerns over liquidity in key areas of financial markets, she said.
Ms Georgieva called on policymakers to take measures that help stabilise the economic environment.
She cautioned that not enough monetary tightening may cause inflation to become de-anchored and entrenched, requiring greater interest rate increases in the future, which would dent growth and affect people's livelihoods.
An “immediate priority” is a fiscal policy that is in synch with monetary policy and protects the vulnerable of society, without adding fuel to inflation.
Increased fiscal spending “would make for a very rough and dangerous ride”, while central banks are raising interest rates, she said.
Another priority is supporting emerging market and developing economies who are coming under pressure owing to the strong US dollar, higher borrowing costs and increased capital outflows.
The IMF estimates the probability of portfolio outflows from emerging markets over the next three quarters has risen to 40 per cent, which could pose a major challenge to countries with large external financing needs
“Maintaining exchange rate flexibility will help. But countries would also benefit from a more proactive approach and from taking precautionary steps before a crisis emerges,” Ms Georgieva said.
The risk of a debt crisis widening in emerging economies is increasing which could affect the global economy and financial stability.
More than a quarter of emerging economies either defaulted or had bonds trading at distressed levels, according to the fund. More than 60 per cent of low-income-countries are in or at high risk of debt distress.
The IMF has provided $258 billion to 93 countries since the start of the pandemic and $90bn to 16 states since the start of the Ukraine war in February.
“To reduce the risk of debt crises, large creditors such as China and the private sector have a responsibility to act,” Ms Georgieva said.
Countries around the world need to boost co-operation to address fragmentation among states, climate change and counter acute food insecurity that is now affecting 345 million people.
“Our world economy is like a ship in choppy waters. We need all the wisdom we can muster — to steady the ship and navigate through what is ahead,” Ms Georgieva said.