Global recession risk rising as economic outlook ‘darkens significantly’, IMF says

The outlook for the global economy has “darkened significantly” in recent months, the head of the IMF has warned, and the world faces an increasing risk of recession in the next 12 months.

The commodity price shock from the war in Ukraine had exacerbated the cost-of-living crisis for hundreds of millions of people, Kristalina Georgieva said on Wednesday, and it was “only getting worse”.

Inflation was also higher than expected, she said in a blogpost that came on the same day as the latest figures showed that prices in the US rose at a 40-year high of 9.1% in June.

Economists and investors now think the US Federal Reserve could hike interest rates by a historic 1% when its board meets in two weeks’ time.

The Bank of Canada shocked markets on Wednesday by raising its base rate by a full percentage point. Its decision and the Fed expectation will heap pressure on other central banks to keep raising rates to bring inflation under control.

With supply bottlenecks and repeated Covid lockdowns in China also crimping the world’s patchy pandemic recovery, Georgieva said the G20 finance ministers and central bankers gathering in Bali “face a global economic outlook that has darkened significantly”.

“The outlook remains extremely uncertain. Think of how further disruption in the natural gas supply to Europe could plunge many economies into recession and trigger a global energy crisis,” she wrote. “This is just one of the factors that could worsen an already difficult situation.

“It is going to be a tough 2022 – and possibly an even tougher 2023, with increased risk of recession.”

The IMF would be downgrading its growth forecasts for global growth for both 2022 and 2023 later this month, she said, having warned in April that its forecast of 3.6% was likely to be revised downwards.

The European Commission was expected to cut its eurozone GDP forecast for 2023 to 1.4% from 2.3% on Thursday, according to Bloomberg, citing a leaked draft from the EU executive in Brussels. Inflation in the single currency area is expected to average 7.6% this year before falling to 4% next year, the document said.

The European Central Bank is under pressure to raise interest rates to combat inflation and protect the euro, which this week slumped to parity with the US dollar for the first time in two decades.

Georgieva said raising rates to combat inflation was one of three key policies needed to combat the threat to the world economy along with reducing government debt and more global cooperation.

But raising rates is a high-risk strategy for many countries amid increasing alarm in the UK, for example, that the Bank of England’s aggressive rate hikes will plunge the country into recession.

EU countries also face the same dilemma at a time when it faces a potentially crippling energy crisis this coming winter if, as expected, Russia turns off the supply of natural gas over the bloc’s opposition to the Kremlin’s war against Ukraine.