There is talk of a global purchasing power crisis, and the global economy is in even worse shape than expected. That is what chief economist Pierre-Olivier Gourinchas of the International Monetary Fund (IMF) said in the World Economic Outlook, the Fund’s most important publication, on Tuesday. It estimates that the growth of the global economy is lower than expected for the fourth time in a row.
IMF director Kristalina Georgieva and World Bank president David Malpass have already warned of a global recession amid persistently high inflation. They made their statements at the kick-off of the annual meeting of both institutes, this week in the American capital Washington. According to Georgieva, a third of the world economy will go through an economic recession next year.
The IMF identifies three major forces acting on the economy: the Russian invasion of Ukraine, more expensive energy and food and the resulting rising inflation and purchasing power crisis, and a sharp slowdown in economic growth in China. That country’s economy is suffering from a weakening housing market and regular lockdowns to contain the spread of the corona virus. In addition, central banks, especially in the West, are raising interest rates to dampen economic growth and thus curb inflation. The IMF notes that global inflation is ‘stubborn’ for the time being. Even after falling from its current high level, it will still be 4.1 percent in 2024.
High dollar rate
The strong dollar, the result of rapid US interest rate hikes and international investors’ flight to US sovereign debt, is a growing problem for emerging countries. The high dollar exchange rate leads to rising costs of imports and thus to extra high inflation. It makes foreign debts, which are often denominated in dollars, extra expensive to repay.
Nevertheless, the IMF advises central banks to give priority to combating inflation. Interest rate hikes that are too small or too late will otherwise cause bigger problems later, when even stronger rate hikes may be needed to curb a then persistent inflation. Preventing high inflation from becoming anchored in household and business expectations can help prevent an upward spiral where prices and wages are chasing each other.
For the Netherlands, the IMF predicts economic growth of only 0.8 percent next year, lower than the 1.5 percent that the Central Planning Bureau (CPB) signed in September for 2023. Dutch inflation is 12 percent this year and 8 percent next year. per cent. That is the highest in the entire eurozone in both years, after the Baltic countries. Last month, the CPB forecast a fall in inflation to 2.5 percent in 2023.
The global economy as a whole will grow by 3.2 percent in 2022 and by 2.7 percent next year, according to the IMF. That is significantly lower than the average growth of 3.7 percent since 1980.
The Fund sees hardly any positive surprises for its forecasts. There are even more downside risks. The blows are so great and frequent that the question arises why the general forecasts have not already been lowered further in advance.
The IMF economists summarize the possible risks in an extensive appendix. For example, the price of oil could turn out 30 percent higher than expected, due to export restrictions imposed on Russia or, on the contrary, the throttling of oil exports on its own initiative by the Russian government itself. This could lower global economic growth by half a percentage point.
The Chinese real estate sector could face further difficulties, leading to a decline in Chinese investment. Because the real estate sector contributes a fifth to a quarter to economic growth in China, and that country is weighing more and more in the global economy, this could lead to global economic growth that is 0.3 percentage point lower than expected.
There is also the risk that the labor market in the West will remain tight and that supply and demand there will be difficult to match. That comes at the expense of productivity. As a result, the global economy may grow 0.3 percentage point slower than anticipated.
All these three trends could subsequently lead to a further cooling of the financial climate. Western countries may see interest rates on corporate loans rise by an extra percentage point. Emerging countries are seeing their currencies lose even more against the US dollar than they already are – Asian countries are doing a little better than non-Asian countries. This leads to rising interest rates, especially on dollar loans they have taken out.
In turn, the deteriorating financial environment is reinforcing economic conditions. The IMF estimates that this could save 0.5 percentage point in global economic growth.
Added together, the downward scenario means that global economic growth could be more than 1.5 percentage points lower in 2023 and 1.6 percentage points in 2024. That in turn implies that there is a chance of very low growth next year that has only occurred five times since 1970 , and that this low growth is unlikely to be followed by an extra good year this time, such as after the financial crisis and the Covid pandemic. The effect of the negative scenario on inflation is mixed: 1.3 percentage points higher than expected in 2023 and just 1 percentage point lower in 2024.
The IMF predicts a relatively small contraction of the Russian economy, with 3.4 percent this year and 2.3 percent in 2023. The Ukrainian economy will shrink by 35 percent this year. The IMF is not making any forecasts for next year.