"the worst is yet to come": The International Monetary Fund issues a harsh recession warning

( Business) –– The International Monetary Fund (IMF) again reduced its forecast for the global economy with a stark warning: “The worst is yet to come. And 2023 will feel like a recession for many people.”

The IMF said on Tuesday that it expects global growth to slump to 2.7% next year, with a 25% chance it will fall below 2%. Which compares to projected growth of 3.2% this year.

The figure for 2023 is 0.2 percentage point below the outlook the fund issued in July, as Russia’s war in Ukraine, high inflation and a slowdown in China drag down economic activity.

“More than a third of the world economy will contract this year or next, while the three largest economies — the United States, the European Union and China — will remain stagnant,” said Pierre-Olivier Gourinchas, chief economist at the IMF.

The IMF forecast on inflation

The International Monetary Fund believes global inflation will peak later this year but, it warned, “will remain elevated for longer than expected” even as central banks move aggressively to rein it in.

Global inflation is expected to soar from 4.7% in 2021 to 8.8% this year. Afterwards, it is forecast to drop again to 6.5% in 2023 and 4.1% by 2024.

The main central banks point to an inflation close to 2%, and interest rates rose in an attempt to limit price increases. However, the efforts have also increased the risks for the economy.

If they take excessive measures, it could exacerbate a global recession. But scaling back efforts may allow inflation — which the IMF called “the most immediate threat to current and future prosperity” — to take hold.

“Central banks around the world are now carefully focusing on restoring price stability. And the pace of tightening has accelerated considerably,” Gourinchas wrote. “There are risks of both underfitting and overfitting,” he pointed out.

Prepare “for what’s ahead”

Last week, the United Nations Conference on Trade Development warned that tighter monetary policy could cause more damage worldwide than the financial crisis of 2008 and the impact of covid-19 in 2020.

The IMF indicated that the rate increase, while necessary, is creating instability. Especially for emerging markets with high levels of debt.

“As the global economy heads into troubled waters, financial turmoil is likely to break out, prompting investors to seek the protection of safe-haven investments such as US Treasuries and causing the dollar rise even more,” he said. “Now is the time for emerging market policymakers to prepare for what’s ahead.”

The most recent forecasts included some notable reductions for large economies. The US is now expected to grow just 1.6% this year, and is expected to expand just 1% in 2023.

Growth in China was also revised down to 3.2% in 2022 and 4.4% in 2023. The IMF pointed to the lingering effects of attempts to contain the spread of the coronavirus and the rapidly weakening real estate sector. , which he said accounts for about a fifth of the country’s economic activity.

“Given the size of China’s economy and its importance to global supply chains, this will weigh heavily on global trade and activity,” the fund said.