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IMF lowers global growth outlook amid slowdown in US and China

#IMF #lowers #global #growth #outlook #slowdown #China

Rising inflation and sharp slowdowns in the United States and China prompted the IMF on Tuesday to downgrade its outlook for the global economy this year and next, while warning the situation could get much worse.

“The prospects have clouded over significantly since April,” said IMF chief economist Pierre-Olivier Gourinchas. “The world could soon be on the brink of a global recession, just two years after the last one.”

“The world’s three largest economies, the United States, China and the eurozone, are faltering, with important implications for the global outlook,” he told a briefing.

In its latest World Economic Outlook, the International Monetary Fund cut its estimate of global GDP for 2022 to 3.2 percent, four-tenths of a point lower than the April forecast and about half the rate recorded last year.

The “tentative recovery” from the pandemic downturn over the past year “was followed by increasingly gloomy developments in 2022 as risks began to materialize,” the report said.

“Several shocks have hit a global economy already weakened by the pandemic,” including the war in Ukraine, which has pushed up global food and energy prices and prompted central banks to raise interest rates sharply, the IMF said.

Ongoing Covid-19 lockdowns and a deepening housing crisis have hampered economic activity in China, while aggressive US Federal Reserve rate hikes are severely slowing US growth.

But the IMF gave the forecasts a clear caveat, warning that “risks to the outlook are overwhelmingly to the downside” and if they materialize, could plunge the global economy into one of the worst downturns of the last half century.

Key concerns include the fallout from the war in Ukraine, including the possibility of Russia cutting off natural gas supplies to Europe, as well as further price hikes and food shortages due to the stranglehold the war could have on grain supplies, leading to starvation.

In an ominous warning, the WEO said: “Such shocks, if sufficiently severe, could cause a combination of recession accompanied by high and rising inflation (“stagflation”).”

That would put the brakes on growth, slowing it to 2.0 percent by 2023. The global growth rate has been only five times slower since 1970, the report says.

Gourinchas said that would be “very close to a global recession.”

– Inflation Priority –

The top priority for policymakers is to contain rising prices, even at the cost of hurting their citizens, the fund said, as the damage done by inflation raging out of control would be far worse.

Gourinchas, in a blog post about the report, noted that the “synchronized” actions by major central banks to manage the threat of inflation “are unprecedented in history and their impact is expected to bite.”

“Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate the hardship,” he said.

The IMF now expects consumer prices to rise 8.3 percent this year, nearly a full point higher than previously forecast, while emerging markets face a 9.5 percent rise in consumer prices.

But “further supply-side shocks in food and energy prices from the war in Ukraine could push headline inflation sharply higher.”

That would add to the pain for poor nations, least able to withstand the shock, where groceries make up a larger chunk of family budgets.

– US and China slowdown –

While the global economy performed slightly better-than-expected in the first three months of the year, it “appears to have contracted in the second quarter — the first contraction since 2020,” the IMF said.

The IMF has downgraded growth forecasts for most countries, including major revisions for the United States and China, removing more than a notch from previous forecasts.

The fund now sees US growth this year of just 2.3 percent amid slowing consumer spending and rising interest rates, and the report said a recession – defined by two quarters of negative growth – may already have begun.

China’s economy is expected to slow dramatically in 2022, growing just 3.3 percent — the lowest in more than four decades other than the 2020 pandemic crisis — due to Covid concerns and the “worsening crisis” in the real estate sector, the report said.

“The slowdown in China is having global consequences: lockdowns, added to disruptions in global supply chains, and contraction in domestic spending are reducing demand for goods and services from China’s trading partners,” the report said.

There were some exceptions to the bleak outlook, including upgrades for Italy, Brazil and Mexico, as well as Russia, which is still expected to contract but is benefiting from rising oil prices on the back of Western sanctions, the WEO said.

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