FX.co ★ IMF warns of global recession

Global growth is now projected to slow to 3.2% in 2021, which is 0.4 percentage points lower than in April, the IMF said.Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while US consumer spending undershot expectations.Several shocks have hit a world economy weakened by the pandemic. Higher-than-expected inflation worldwide, especially in the United States and major European economies, triggering tighter financial conditions. The number one priority is to tame inflation. However, that could lead to real economic costs, including a global recession.Geopolitical tension could lead to a sudden stop of European gas imports from Russia. Inflation could be harder to bring down than anticipated either if labor markets are tighter than expected or inflation expectations unanchor. Moreover, tighter global financial conditions could induce debt distress in emerging market and developing economies.According to the outlook, inflation is expected to have the most significant impact on the world economy in 2023.Global inflation is expected to reach 6.6% in advanced economies and 9.5% in emerging market and developing economies this year—upward revisions of 0.9 and 0.8 percentage points, respectively. In 2023, disinflationary monetary policy is expected to bite, with global output growing by just 2.9%.Despite still expecting positive economic growth, the future remains uncertain and highly dependent on how various economies react to tighter monetary policies."The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one," IMF Chief Economist Pierre-Olivier Gourinchas said.The apprehension is that risks listed by the IMF in April are materializing. These include a sudden stop of European gas flows from Russia, stubbornly high inflation de-anchoring future price expectations, a surge in debt stress due to tighter monetary policies, renewed COVID outbreaks, rising threats from food insecurity, and geopolitical fragmentation.Looking at the outlook country-by-country, the IMF's downgrade to the US expansion was one of the biggest. The US is now expected to grow 2.3%, which is 1.4 percentage points lower than the April forecast.The IMF noted that the risk of recession would be at its highest level in 2023 due to growth bottoming out and household savings declining.For example, according to the latest forecasts, the United States will have real GDP growth of only 0.6% in the fourth quarter of 2023 on a year-over-year basis. This will make it increasingly challenging to avoid a recession.