The IMF warns that growth will slow and market risks will rise as fiscal officials meet

WASHINGTON, Oct 11 (Reuters) – Colliding pressures from inflation, war-driven energy and food crises and high interest rates are pushing the world to the brink of recession and threatening financial market stability, the International Monetary Fund warned on Tuesday.

In gloomy reports released at the start of the annual meetings of the International Monetary Fund and World Bank, the first in three years, the IMF urged central banks to continue their fight against inflation. The dollar hit a two-decade high, two key drivers of financial market volatility.

Further downgrading its 2023 global growth projections, the IMF said in its World Economic Outlook that countries representing a third of global output could be in recession next year.

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“The big three economies of the US, China and the euro area will continue to stagnate,” IMF chief economist Pierre-Olivier Gourinchas said in a statement. “In short, the worst is yet to come, and for many, 2023 will be a recession.”

The IMF said global GDP growth will slow to 2.7% next year, down from its July forecast of 2.9%, as higher interest rates slow the US economy, gas prices rise in Europe and China continues to struggle with COVID-19 lockdowns. A weak property sector.

The global lender maintained its 2022 growth forecast at 3.2%, reflecting stronger-than-expected output in Europe but a weaker performance in the US, which lost 6.0% global growth last year as the COVID-19 pandemic subsided.

Some major European economies will fall into a “technological recession” next year, including Germany and Italy, as energy prices rise and deficits cut output. China’s growth outlook has also been downgraded as it grapples with persistent COVID-19 lockdowns and a weak asset sector, where a deeper recession could dampen further growth, the IMF said.

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Rising economic pressures, coupled with liquidity constraints, stubborn inflation and lingering financial vulnerabilities, are raising the risks of disorderly asset revaluations and financial market contagion, the IMF said in its Global Financial Stability Report.

“It’s hard to think of a time when uncertainty was so high,” Tobias Adrian, the IMF’s director of monetary and capital markets, told Reuters in an interview. “We have to go back several decades to see so much conflict in the world, while inflation has been so high.”

The logo of the International Monetary Fund (IMF) is seen outside its headquarters building in Washington, U.S. IMF Managing Director Christine Lagarde meets with Argentine Finance Minister Nicolas Dujove on September 4, 2018. REUTERS/Yuri Gripas

Finance officials from the IMF’s 190 member countries are in Washington this week grappling with these uncertainties from a range of economic conditions, food and energy crises fueled by the war in Ukraine and other global challenges, including massive clean energy financing needs.

Priority: Inflation

The IMF said central bankers have a delicate balancing act to fight inflation without too much tightening, which could push the global economy into an “unnecessarily severe recession” and heap economic pain on emerging markets where their currencies are falling sharply against the dollar.

But Gourinchas said the big priority was controlling inflation, and letting go too soon would undermine the “hard-won credibility” of central banks.

“What we’re suggesting is that central banks should certainly. That doesn’t mean they should accelerate compared to what they’re doing now,” Gourinchas told a news conference. Shift course.

“I think our advice now is, ‘Let’s make sure we see a decisive decline in inflation’.”

The IMF predicts that global consumer price inflation will be 9.5% in the third quarter of 2022, slowing to 4.7% in the fourth quarter of 2023.

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But if the global economy is hit by a “combination of plausible shocks”, including a 30% increase in oil prices from current levels, the IMF said, global growth could slow to 1.0% next year – a relative level. Real income falls sharply.

Other elements of this “downside scenario” include a steep decline in Chinese property sector investment, a sharp tightening of financial conditions due to emerging market currency depreciation, and continued overheating of labor markets resulting in lower productivity.

The IMF cut the 25% probability of global growth next year to below 2% – which has happened only five times since 1970 – and said the chance of global GDP shrinking is more than 10%.

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Report by David Lauder; Editing by Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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