The IMF has warned that global growth is slowing under the burden of high inflation, the impact of Russia’s war in Ukraine, and the lingering effects of the pandemic, adding that more than a third of world economies could contract in 2023.
The Fund expects global growth to remain unchanged in 2022 at 3.2 percent and to slow to 2.7 percent in 2023—0.2 percentage points lower than the July forecast—with a 25 percent probability that it could fall below 2 percent, Pierre-Olivier Gourinchas, the IMF’s Chief Economist, said on Tuesday, October 11 in Washington, DC.
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“The global economy is weakening further and facing a historically fragile environment. The outlook continues to be shaped by three forces,” Gourinchas said.
“Persistent and broadening inflation, causing a cost-of-living crisis, the Russian invasion of Ukraine and the associated energy crisis, and the economic slowdown in China. For this year, our projection for world GDP growth is unchanged at 3.2%, as in the July World Economic Outlook update. Global growth is forecast to slow down to 2.7% in 2023, 0.2 percentage points lower than projected in July. The slowdown is broad-based,” he added.
Gourinchas said more than a third of the global economy will contract in 2023, while the three largest economies in the world, the United States, the Euro area, and China will continue to stall. “For the first time, we calculated risks around the baseline projections. We find there is a 25% chance that growth will fall below 2% in 2023. This happened exceedingly rarely in the past and a 10 to 15% chance it will fall below 1%, corresponding to a decline in real output per capita,” said Gourinchas.
The Fund says that downside risks remain elevated, while policy trade-offs to address the cost-of-living crisis have become acutely challenging. According to the IMF, the risk of monetary, fiscal, or financial policy miscalibration has risen sharply at a time when the world economy remains historically fragile and financial markets are showing signs of stress.
“Unfortunately, most risks to the outlook are to the downside. There’s a risk of monetary policy, miscalibration at a time of high uncertainty and fragility. In particular, we are concerned that central banks will ease too early, causing inflation to remain excessively high and requiring a much larger loss of output later. A persistently strong dollar could fuel inflation and amplify financial tightening, especially in emerging markets and developing economies,” the Chief Economist said.
“High post-pandemic debts and higher borrowing costs could cause widespread debt distress in low-income countries. A deeper real estate crisis in China could cause severe financial stress. The war could further destabilize energy markets. A resurgence of the pandemic would hit under-vaccinated regions hard, especially Africa. Lastly, further geopolitical fragmentation could hamper global policy coordination and trade,” added Gourinchas.
He noted that persistent and broadening inflation pressures have triggered a rapid and synchronized tightening of monetary conditions, alongside a powerful appreciation of the US dollar against most other currencies. According to him, tighter global monetary and financial conditions will work their way through the economy, weighing demand down and helping to gradually subjugate inflation.
“The biggest fight now is the fight against inflation. Central banks are laser-focused and they need to keep a steady hand. Growth will slow in 2023 as conditions tighten and some financial fragilities may emerge. But the main priority should be to restore price stability. This is the bedrock of future economic prosperity,” Gourinchas stressed.
Next to that, he said, fiscal policy needs to be guided by coherent economic principles. “First, pandemic-era stimulus should be withdrawn, and buffers rebuilt. Second, fiscal policy should not work at cross-purposes with monetary policy. Third, the energy crisis will be long lasting,” he said. Solving this requires supply to increase and demand to decrease, he said.
According to the Economist, price signals will be important to achieve the above objectives. He urged Governments should provide direct, temporary and targeted help to low- and middle-income families.
“Finally, many countries are struggling with the strength of the dollar. Yet this reflects mostly the speed of the tightening cycle in the United States, as well as the energy crisis. Unless financial markets become severely disrupted, monetary policy should focus on inflation while allowing the exchange rate to adjust to underlying economic forces,” warned Gourinchas.
Cuts Nigeria’s growth prospect to 3% in 2023
Similarly, the Fund in its latest World Economic Outlook (WEO) downgraded Nigeria’s growth prospects from 3.4 per cent to 3.2 per cent for 2022 and further downgraded 2023 forecast from 3.2 per cent to 3.0 per cent.
The development is 0.2 percentage points lower than the 3.4 percent projected in its July 2022 report
The Fund also revealed that to cushion the elevated hike in food prices globally, it has introduced a food short window, which would allow a number of countries to access emergency financing to deal precisely with elevated food prices.
Speaking at the WEO briefing in response to a question on Nigeria’s Central bank’s conventional and unconventional tools deployed at fighting against inflation, Chief Economist and Director Research Department of the IMF, Pierre-Olivier Gourinchas said: “Our advice, in general, is that central banks should first start with the traditional instruments of monetary policy and as you want to think about non-conventional instruments then you should think about what is the friction that is preventing the conventional monetary policy from working.
“It will require a country or a central bank to deploy alternative ways of charting a course for monetary policy.”
On his part, the Divisional Chief Research Department, Daniel Leigh, added: “So, for Nigeria, in particular, we forecast inflation at about 19 per cent this year, but then some moderation next year down to 17 per cent, and part of that does reflect the monetary policy actions which is the 4 per cent point increase in Nigeria’s Central Bank as well as the decline that we expect in oil and food prices globally.”
Furthermore, on low-income countries who have been affected by the rise in food prices, Gourinchas added: “A lot of hardship, especially for low-income households for whom the food and energy component but their basket is very important. Of late, food prices started to turn around and come down. There had been some positive developments, for instance, the Black Sea Green Deal that was implemented over the summer that allowed the exports of Ukraine wheat and some of the increases you’ve seen in the last few days reflect some uncertainty about the continuation of the deal given the situation in Ukraine.”
“This is one of the risks that we highlight is that you could have a lot of uncertainty in food and energy markets related to the war.
“The fund has just opened its food short window, which allows a number of countries to access emergency financing to deal precisely with elevated food prices. And so, this has just started and, and we expect a number of countries will be able to access funding through that new facility that is part of the emergency funding we have.”
The Central Bank of Nigeria on September 27 raised its Monetary Policy Rate by one percentage point 15 percent in continuation of its tightening measures to stem the rise in inflationary pressure. Headline inflation in Nigeria rose to 20.52 percent in August, up from 19.64 percent in July, while Food Inflation accelerated to 23.12 percent.
By Vincent Nwanma and Sunday Michael Ogwu
