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The International Monetary Fund (IMF) has cautioned that the global economy could soon be edging towards a recession amid indications that the world’s three biggest economies, the US, China and Europe, are stalling, while inflation is higher than previously forecast.

In a more pessimistic update to its April world economic outlook, the IMF downgraded growth forecast for 2022 and 2023, and raised the possibility of a more pronounced slowdown.

Noting the first contraction since the start of the COVID-19 pandemic, the IMF said issues in China and Russia led to global output falling in the second quarter of 2022.

“The outlook has darkened significantly since April,” said the IMF’s economic counsellor, Pierre-Olivier Gourinchas. “The world may soon be teetering on the edge of a global recession, only two years after the last one.”

The IMF now expects the global economy to grow by 3.2 per cent in 2022, a drop of 0.4 percentage points since its April outlook. The slowdown is predicted to continue into 2023, at 2.9 per cent, 0.7 percentage points lower than thought in the IMF’s April assessment.

The forces shaping the IMF’s outlook

“A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022,” it noted.

“Downside risks discussed in the April 2022 World Economic Outlook are materializing, with higher inflation worldwide, especially in the United States and major European economies, triggering a sharp tightening in global financial conditions; a sharper-than-anticipated slowdown in China, reflecting COVID-19 outbreaks and lockdowns; and further negative cross-border effects from the war in Ukraine.”

In its report, the IMF identified key developments shaping its gloomier outlook:

  • Global inflation again surprises, with consumer prices rising faster than expected, prompting more central bank tightening
  • China’s economic slowdown has added to global supply chain disruptions, with its aggressive use of lockdowns as it pursues a zero-COVID policy impacting economic activity
  • The was in Ukraine continues, causing widespread hardship
  • A worsening food crises, with countries that have diets tilted towards commodities with large price gains, those more dependent on food imports – such as Malta – and those with a large pass-through from global to local staple food prices the most distressed

“The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, is facing an increasingly gloomy and uncertain outlook,” Mr Gourinchas said.

“Higher than expected inflation, especially in the United States and major European economies, is triggering a tightening of global financial conditions. China’s slowdown has been worse than anticipated amid COVID-19 outbreaks and lockdowns, and there have been further negative spillovers from the war in Ukraine.”

Inflation projections

The IMF predicts that by the fourth quarter of 2022, global inflation will reach 8.3 per cent, up from its April estimate of 6.9 per cent. It highlighted the UK – where inflation is now on track to be 2.7 points higher at 10.5 per cent – and the eurozone (up 2.9 points to 7.3 per cent) as places where cost of living pressures had particularly intensified.

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