IMF chief gives gloomy assessment of global economy

The global economy will feel like it’s in recession next year, the head of the IMF warned Thursday as the fund prepared to cut its economic forecasts again.

Ahead of the annual fund and World Bank meetings, Kristalina Georgieva said that a third of the world economy will suffer at least two-quarters of the economic contraction in 2023. Georgieva added that the combination of “shrinking real incomes and rising prices” would mean many other countries would feel like they were in recession even if they avoided a direct drop in output.

The comments signal that the IMF will again downgrade its economic forecasts for the fourth straight quarter next week.

Blaming “several shocks” including Russia’s invasion of Ukraine, high energy and food prices and ongoing inflationary pressures, she said growth had slowed in all of the world’s largest economies, leaving “severe burdens” in some places.

The situation will “deteriorate rather than improve” in the short term, she said, in part because risks to financial stability are emerging in China’s real estate market, government bonds and illiquid assets. The near-collapse of some UK pension funds last week, following UK Chancellor Kwasi Kwarteng’s announcement that he would announce £45bn of unfunded tax cuts, has raised concerns that low growth and higher borrowing costs will trigger market turmoil.

However, the IMF wants central banks to continue tightening monetary policy at a brisk pace to deal with ongoing inflationary pressures and to ensure that rising prices do not take hold in companies’ attitudes towards their fees and wages.

“Insufficient tightening would result in inflation being unanchored and stalled, which would require future interest rates that are much higher and more sustainable, causing massive damage to growth and people,” Georgieva said.

However, she acknowledged that it would be very difficult for monetary policymakers to assess the impact of their policies if they were coordinated so quickly. Too many big rate hikes could result in a “protracted recession,” but the risk of doing too little is greater right now, she said.

Without naming Britain or Germany, the chief executive took a swipe at the recently announced measures to combat high energy prices, which have shielded homes and businesses from much of the price hike.

The IMF has already publicly chided the UK government for its generous energy support and unfunded tax cuts. Georgieva’s speech indicated that the fund was in no mood to offer more nuanced advice ahead of next week’s visits to Washington by finance ministers and central bankers.

Calling for temporary and targeted support for vulnerable families, she said “prolonged price control is neither affordable nor effective”.

She highlighted the inflationary risks of injecting too much money into the economy to protect households while central banks hike interest rates to slow spending and keep inflation low.

“While monetary policy is hitting the brakes, you shouldn’t have fiscal policy hitting the gas pedal. It would make for a very rough and dangerous ride,” said Georgieva.

High food prices are causing pain to emerging market households and an unsustainable debt crisis in many countries, she added. For countries in dire need of food this winter, it offered a new “food shock” line of credit, under which countries could draw up to half the money they had pledged to the IMF.

The pain in the global economy would not last, she said, but a quick solution to the world’s economic problems would depend on working together, particularly food security, climate change and debt relief for the most vulnerable countries.