On October 11, while International Monetary Fund (IMF) disclosed the latest issue of the " World Economic Outlook Report ", it also released an article by IMF chief economist Pierre-Olivier Gourinchas on its official website - "The global economy is overcast, and policy makers need stable intervention."
Gulinchas' article pointed out that the global economy continues to face severe challenges. Russia's invasion of Ukraine, the cost of living crisis caused by the continuous and expanding inflationary pressures, and the tightening of the US monetary policy have all posed severe challenges to the global economy. The following is the article translation:
Our forecast for global growth this year remains unchanged at 3.2%, while our forecast for next year is down to 2.7%, 0.2 percentage points lower than our forecast for July. The economic slowdown in 2023 will be broad, with countries that account for about one-third of the global economy set to contract this year or next. Overall, this year’s shock will reopen the economic trauma that has only partially healed after the pandemic. In short, the worst moments are yet to come, and for many, 2023 will feel like a recession.
In the United States, tightening of the monetary and financial environment will slow growth to 1% next year. The economic slowdown is most obvious in the euro zone. The war-induced energy crisis will continue to cause a heavy blow, and the economic growth rate will drop to 0.5% by 2023.
Almost everywhere, the rapidly rising prices, especially food and energy prices, have caused serious difficulties for families, especially the poor.
Despite the slowdown, inflationary pressures have proven to be wider and longer lasting than expected. Currently, global inflation is expected to peak at 9.5% this year before decelerating to 4.1% by 2024. Inflation also goes far beyond the food and energy sectors. Global core inflation rose from an annualized monthly rate of 4.2% at the end of 2021 to 6.7% of the median countries in July.
The global economic outlook faces huge downside risks, and the policy trade-offs to deal with the cost of living crisis have become more challenging. Those highlighted in our report:
The risk of miscalibration of monetary, fiscal or financial policies has risen sharply in the context of high uncertainty and increasingly vulnerability.
If financial markets break out, global financial conditions may worsen and the US dollar will strengthen further, pushing investors to safe assets. This will greatly increase inflationary pressures and financial vulnerability in other parts of the world, especially emerging markets and developing economies .
Inflation may become more durable again, especially when the labor market is still extremely tight.
Finally, the Ukrainian war is still raging, and further escalation may exacerbate the energy crisis.
Our latest outlook also evaluates the risks we predict at baseline. We estimate that the probability of global economic growth coming next year is about one-quarter. If many risks become a reality, global growth will drop to 1.1% in 2023, with per capita income almost stagnant. According to our calculations, the likelihood of such adverse outcomes or worsening is 10% to 15%.
cost of living crisis
By squeezing actual income and destroying macroeconomic stability, the increasing price pressure remains the most direct threat to current and future prosperity. Central banks in various countries are now focusing on restoring price stability, and the pace of tightening has accelerated sharply.
has the risk of under-tightening and excessive tightening. Inadequate tightening will further aggravate inflation, weaken central bank credibility and weaken inflation expectations. As history tells us, this only increases the ultimate cost of controlling inflation.
The risk of over-sustainment pushes the global economy into an unnecessary severe recession. Financial markets may also struggle with too fast tightening. However, the cost of these policy errors is asymmetric. If central banks misjudgment the stubborn persistence of inflation again, their hard-won credibility could be damaged. This will prove to be even more unfavorable to future macroeconomic stability. Financial policies should ensure that the market remains stable when necessary. However, the central bank needs to maintain a stable monetary policy and firmly focus on suppressing inflation.
Developing appropriate fiscal responses to address the cost of living crisis has become a serious challenge. Let me mention a few key principles:
First of all, fiscal policy should not go against the monetary authorities' efforts to reduce inflation. As recent events show, doing so will only prolong inflation and can lead to severe financial instability.
Secondly, the energy crisis, especially the energy crisis in Europe, is not a temporary impact. The geopolitical adjustment of post-war energy supply was broad and lasting. Winter 2022 will be challenging, but winter 2023 may be worse. Price signals are crucial to curbing energy demand and stimulating supply. Price controls, untargeted subsidies or export bans are financially expensive and lead to over-demand, inadequate supply, improper distribution and rationing. They rarely work. Instead, fiscal policy should aim to protect the most vulnerable groups through targeted temporary transfers.
Third, fiscal policy can help economies adapt to more turbulent environments by investing in production capacity: human capital, digitalization, green energy and supply chain diversification. Expanding these can make economies more resilient to future crises. Unfortunately, these important principles do not always guide policies at the moment.
The impact of strong US dollar
For many emerging markets, the strengthening of the US dollar is a major challenge. The U.S. dollar is currently at its highest level since the early 2000s, although the currency appreciation for advanced economies is the most obvious. So far, the rise appears to be driven mainly by fundamental factors such as the tightening of the U.S. monetary policy and the energy crisis.
Most emerging and developing countries 's appropriate response is to adjust monetary policies to keep prices stable while allowing exchange rate to adjust to retain valuable foreign exchange reserves when financial conditions really deteriorate.
The global economy is overcast and now is the time for policy makers in emerging markets to take action.
Eligible countries with sound policies should urgently consider improving their liquidity buffers, including requiring access to IMF's prevention tools. States should also minimize the impact of future financial turmoil, as appropriate, by combining preemptive macroprudentials and capital flow measures.
Too many low-income countries are in or near debt difficulties. In order to avoid a wave of sovereign debt crisis , an orderly debt restructuring through the G20 is urgently needed to target the most affected common framework.
