IMF warns of slowing growth, rising market risks as finance officials meet

WASHINGTON, Oct 11 (Reuters) – The International Monetary Fund warned on Tuesday that conflicting pressures from inflation, war-related energy and food crises and sharply higher interest rates are pushing the world to the brink of recession and threatening financial stability.

In somber reports released at the start of the first in-person annual meetings of the International Monetary Fund and World Bank in three years, the IMF urged central banks to continue their fight against inflation despite the pain from monetary tightening and the rising dollar a two-decade high, the two main reasons for recent volatility in financial markets.

The IMF further lowered its global growth forecasts for 2023 and said in its World Economic Outlook that countries that account for a third of world production could slide into recession next year.

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“The three largest economies, the United States, China and the eurozone, will continue to falter,” Pierre-Olivier Gourinchas, the IMF’s chief economist, said in a statement. “In short, the worst is yet to come, and for many people, 2023 will feel like a recession.”

The IMF said global GDP growth will slow to 2.7% next year from its July forecast of 2.9% as higher interest rates slow the US economy as Europe struggles with soaring gas prices and China is grappling with ongoing COVID-19 lockdowns and a flagging real estate sector.

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The global lender kept its growth forecast for 2022 at 3.2%, reflecting a stronger-than-expected performance in Europe but a weaker performance in the United States, after a blistering 6.0% global growth last year, as the COVID-19 pandemic subsided.

Some key European economies will fall into a “technical recession” next year, including Germany and Italy, as energy price spikes and shortages hit production. China’s growth prospects were also downgraded as it grapples with ongoing COVID-19 lockdowns and a flagging real estate sector, where a deeper downturn would slow growth further, the IMF said.

Mounting economic pressures, coupled with tight liquidity, stubborn inflation and persistent financial vulnerabilities, are increasing the risks of disorderly asset repricing and financial market contagion, the IMF said in its Global Financial Stability Report.

“It’s hard to imagine a time when uncertainty was so high,” Tobias Adrian, the IMF’s director of money and capital markets, said in an interview with Reuters. “We have to go back decades to see so much conflict in the world and at the same time inflation is extremely high.”

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A man walks past the International Monetary Fund (IMF) logo at its headquarters in Washington, the United States, May 10, 2018. REUTERS/Yuri Gripas

Treasury officials from the IMF’s 190 member countries grappled with these uncertainties this week due to differing economic positions in Washington, along with food and energy crises sparked by the war in Ukraine and other global challenges, including massive clean energy financing needs .

PRIORITY: INFLATION

The IMF said central bankers have had a delicate balancing act to fight inflation without excessive tightening, pushing the global economy into an “unnecessarily severe recession” and inflicting economic pain on emerging markets, which are seeing their currencies fall sharply against the dollar could.

But Gourinchas said controlling inflation is the bigger priority and giving way too soon would erode central banks’ “hard-won credibility”.

“What we recommend is that central banks stay the course. Now that doesn’t mean they should accelerate compared to what they’ve been doing,” Gourinchas said in a news conference, adding that it’s “a bit early” to shift course.

“I think our advice right now is, ‘Let’s make sure we see a meaningful drop in inflation.'”

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The IMF forecasts that global consumer price inflation will peak at 9.5% in the third quarter of 2022 and decline to 4.7% by the fourth quarter of 2023.

But the outlook could darken significantly if the global economy is hit by a “plausible combination of shocks” including a 30% rise in oil prices from current levels, the IMF said, pushing global growth to 1.0 next year % – a related level with sharply declining real incomes.

Other components of this “downside” scenario include a sharp drop in investment in China’s real estate sector, a sharp tightening of financing conditions due to currency depreciation in emerging markets, and continued overheating in labor markets, leading to lower potential output.

The IMF projected a 25% chance of global growth falling below 2% next year – a phenomenon that has only occurred five times since 1970 – and said the chance of a global GDP contraction is more than 10% lie.

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Reporting by David Lawder; Edited by Paul Simao

Our standards: The Thomson Reuters Trust Principles.

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