IMF chief warns of risks of 'runaway' inflation

The risk of global recession is now at 25 per cent, according to the fund

IMF Managing Director Kristalina Georgieva holds a press conference at the IMF's headquarters in Washington during the annual meetings of the IMF and World Bank. Reuters

Inflation has battered the global economy and the world risks a recession next year just as it tries to recover from the Covid-19 pandemic and the war in Ukraine drags on, IMF head Kristalina Georgieva said on Thursday.

“We estimate that two thirds of the world economy will experience two or more consecutive quarters of negative growth,” Ms Georgieva said during a media briefing at the annual International Monetary Fund meeting in Washington.

“The risk of global recession is now 25 per cent.”

Ms Georgieva also warned of the pressure of rising prices, the same day as the US Labour Department released data showing the core consumer price index for September rose by more than forecast to a 40-year high of 6.6 per cent. That means the Fed will almost certainly keep raising interest rates aggressively.

The IMF is endorsing a strong focus on price pressures because the risk of higher inflation expectations becoming de-anchored has become more visible, Ms Georgieva said.

“We cannot possibly allow inflation to become a runaway train — it’s bad for growth and bad for people,” she said. “Bad especially for poor people.”

The IMF predicts that global inflation will rise from 4.7 per cent to 8.8 per cent in 2022 but fall slightly next year to 6.5 per cent, while global economic growth is expected to slow.

The outlook comes as the war in Ukraine will soon enter its ninth month, and amid worsening violence that could further threaten global security and disrupt energy and food supplies.

The world economy could be at an inflection point, Ms Georgieva said.

“Are we experiencing a fundamental shift in the world economy from relative predictability and stability to greater uncertainty and volatility,” she said.

“What does it mean for policymakers? Clearly, a much more complex time.”

The IMF chief said “steady hands on the policy levers” are required to navigate the challenging economic outlook.

The World Bank’s recent report on the Middle East and North Africa region's economic outlook highlighted modest, but uneven growth.

GCC economies have fared well this year, with a 6.9 per cent growth projection for 2022, driven by high oil prices and higher growth rates in non-oil sectors.

Developing oil exporters are forecast to grow at lower levels, expanding 4.1 per cent this year and slowing to 2.7 per cent in 2023.

Jihad Azour, the IMF’s Director of the Middle East and Central Asia Department, emphasised on Thursday that the region needs to prioritise price stability, Covid-19 pandemic relief, food and energy security, and diversifying economies.

“The limited policy space in several countries raises the urgency of pressing ahead with structural reforms to bolster economic growth, while transforming economies to become more resilient, sustainable, and diversified as well as also becoming more inclusive,” Mr Azour said at the IMF conference.

He echoed the World Bank's report on the GCC’s relative resilience.

“Increase in oil price and commodities, for oil exporting countries, that has compensated for the impact of increased interest rates,” Mr Azour told reporters at the IMF conference.

“In addition to that, countries in the GCC were able to obtain lower levels of inflation and have kept the reform programmes that they have started and have helped them diversify their source of revenue.”

David Malpass, President of the World Bank, called the current environment “very challenging.”

The World Bank recently lowered its growth outlook from 3 per cent to 1.9 per cent, which Mr Malpass said was “dangerously” close to a “world recession.”

As the world's leading financial institutions try to navigate these challenging times, Ms Georgieva said; “it is so important that we do demonstrate, we understand the urgency to act and we understand that acting together makes a difference to the lives of hundreds of millions of people.”