IMF Warns of Global Economic Hard Landing
The global financial watchdog is sounding the alarm, suggesting that the world economy has reached a point where a severe recession is virtually inevitable. The recently unveiled IMF World Economic Outlook paints a grim picture, forecasting a significant slowdown in global real gross domestic product (GDP) for 2023. This gloomy outlook points to an imminent hard landing, with advanced economies expected to bear the brunt of the impact.
The Global Economy: Navigating a Hard Landing
The IMF’s latest forecast dispels any hopes of a soft landing for the global economy. The agency observes, “Tentative signs in early 2023 that the world economy could achieve a soft landing—with inflation coming down and growth steady—have receded amid stubbornly high inflation and recent financial sector turmoil.”
Global real GDP growth is poised to decline from 3.4% in 2022 to a mere 2.8% in 2023. While a slight uptick to 3.0% is anticipated for the following year, this trajectory appears to plateau. Moreover, this subdued growth trend is predicted to persist over the next five years, marking it as “the lowest medium-term forecast in decades,” as noted in the IMF’s report.
High Inflation Persists Until 2025
The root cause of this feeble GDP growth can be traced back to the ongoing inflation crisis. Although there are indications of inflation moderating, the process isn’t happening swiftly enough or in the right sectors. While lower food and commodity prices have contributed to some inflation reduction, core inflation (which excludes these factors) remains stubbornly high. The IMF predicts that the earliest we can expect inflation to truly moderate is in 2025.
Central banks have achieved some success in combating inflation by raising interest rates. Unfortunately, this move has also given rise to a mild banking crisis. Consequently, sustaining further inflation reduction through higher interest rates appears unsustainable in the long term.
Global Economic Risks on the Horizon
The IMF’s warnings underscore that the risks are tilted towards even more downside. Their baseline projection assumes successful containment of inflation and the ongoing banking crisis. Progress is indeed being made in controlling inflation, but the uncertainty surrounding banking issues looms large. Containment measures tend to be effective initially but can falter when least expected.
If the financial sector experiences further stress that can’t be contained, global real GDP growth could plummet to a meager 2.5%. This would constitute the most severe recession since 2001, excluding the exceptional events of the pandemic and the 2009 financial crisis. It’s worth noting that these two crises were characterized by induced shocks, whereas the predicted recession resembles a more traditional economic downturn stemming from depleted demand and excessive leverage.
Advanced Economies Bear the Brunt
Surprisingly, it’s the advanced economies that exert the greatest drag on the global forecast. Real GDP growth is projected to decline from 2.7% in 2022 to a mere 1.3% in 2023. Unlike the global forecast, no substantial rebound is foreseen in the following year, with growth inching up only slightly to 1.4%. Within this group, the G7 (+1.1%) and the Euro Area (+0.8%) are the primary contributors to the sluggish performance in advanced economies over the coming months.
Emerging Markets and Developing Economies Show Resilience
Emerging markets and developing economies are expected to navigate this economic storm more effectively. Real GDP growth is projected to experience a minor dip from 4.0% in 2022 to 3.9% in 2023, followed by a robust rebound with 4.2% growth in 2024. This starkly contrasts with the challenges these economies faced during the Global Financial Crisis and the pandemic when they bore the brunt of economic hardships.
Emerging and developing economies, which traditionally tend to be smaller, now include powerhouses like China and India. Their anticipated growth is likely to elevate baseline conditions closer to advanced economy standards.
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