IMF says that prolonged high inflation ruins outlook for global economy
by Associated Press
Persistently high inflation is expected to force the Federal Reserve and other central banks to keep raising rates and to keep them at or near a peak longer to combat surging prices.
The outlook for the world economy this year has dimmed in the face of chronically high inflation, rising interest rates and uncertainties resulting from the collapse of two big American banks.
That’s the view of the International Monetary Fund, which on Apr. 11 downgraded its outlook for global economic growth. The IMF now envisions growth this year of 2.8%, down from 3.4% in 2022 and from the 2.9% estimate for 2023 it made in its previous forecast in January.
The fund said the possibility of a “hard landing,” in which rising interest rates weaken growth so much as to cause a recession, has ‘”risen sharply,” especially in the world’s wealthiest countries.
“The situation remains fragile,” Pierre-Olivier Gourinchas, the IMF’s chief economist, told reporters on Apr. 11. “Downside risks predominate.”
The IMF, a 190-country lending organization, is forecasting 7% global inflation this year, down from 8.7% in 2022 but up from its January forecast of 6.6% for 2023.
Persistently high inflation is expected to force the Federal Reserve and other central banks to keep raising rates and to keep them at or near a peak longer to combat surging prices. Those ever-higher borrowing costs are expected to weaken economic growth and potentially destabilize banks that had come to rely on historically low rates.
Already, Gourinchas warned, higher rates are “starting to have serious side effects for the financial sector.”
The fund foresees a 25% likelihood that global growth will fall below 2% for 2023. That has happened only five times since 1970, most recently when COVID-19 derailed global commerce in 2020.
The IMF also envisions a 15% possibility of a “severe downside scenario,” often associated with a global recession, in which worldwide economic output per person would shrink.
The global economy, the fund warned in Tuesday’s report, is “entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner.”
The IMF issued modest upgrades to the economies of the United States and Europe, which have proved more resilient than expected even with much higher interest rates and the shock of Russia’s invasion of Ukraine.
The fund now expects the United States, the world’s biggest economy, to grow 1.6% this year, down from 2.1% in 2022 but up from the 1.4% expansion that the IMF had predicted in January. A robust U.S. job market has supported steady consumer spending despite higher borrowing rates for homes, cars and other major purchases.
China, the world’s second-biggest economy, is expected to grow 5.2% this year, unchanged from the IMF’s January forecast. China is rebounding from the end of a draconian zero-COVID policy that had kept people home and had hobbled economic activity.
The Fed and other central banks responded by aggressively raising rates. Inflation has been easing, though it remains well above central banks’ targets. Inflation is especially intractable in services industries, where worker shortages are putting upward pressure on wages and prices.
Higher rates have caused problems for the financial system, which had grown used to extraordinarily low interest rates.
