Gloomy landscape. More than a third of the world’s economies will contract by 2023 and the Big Three – the US, China and the European Union – will continue to stagnate. “The worst is yet to come and many people will feel in recession next year,” warns the International Monetary Fund (IMF) in the October review of its global outlook. We will have to be very attentive to Beijing, whose slowdown due to the zero covid policy and the real estate puncture can drag the rest of the planet, infecting it through supply chains and trade, it is added.
The new X-ray leaves little or no room for optimism. The economic outlook continues to point to moderation. Global activity continues to face rampant challenges from the effects of powerful forces: the Russian invasion of Ukraine, with food and energy problems; the cost of living crisis caused by persistent and widespread inflationary pressure (the highest seen in decades); the tightening of monetary policy to combat this phenomenon; and the slowdown in China, in which the throes of covid still play a relevant role.
The IMF’s global growth forecast remains unchanged for 2022, at 3.2%, compared to last July’s forecast, when a reduction of four tenths was already applied for this year. And it points to a reduction to 2.7% for 2023, two tenths less than in July, when it already cut nine tenths. The forecast indicates a 25% chance that it could fall below 2%. How far is that 6.1% increase in the world economy from 2021.
As they say, Spain achieves one of lime and one of sand. After 5.1% in 2021, the perspective of a rebound in GDP for 2022 reaches 4.3%, three tenths more than in the July forecast. However, the forecast for 2023 loses eight tenths and remains at 1.2%. If it is compared with the April document, when there was still no clear impact of the war in Europe, Spain lost half and 2.1 points respectively. “Despite the international context, the IMF confirms the strong recovery of the Spanish economy,” said the First Vice President and Minister of Economic Affairs, Nadia Calviño, after learning the data, in a meeting with the press in New York.
“In Spain, a recovery in industrial and tourism-related production in the first half of 2022 has contributed to projecting growth of 4.3%,” argues the IMF. “However, growth will slow down sharply in 2023,” he predicts.
Despite everything, the country remains in the highest range in its context. “The forecast is that the Spanish economy doubles the growth of the euro zone average and is also well above the other large euro economies,” Calviño points out. Germany, France, Italy or the United Kingdom grow considerably less this year and even next year, in which the Fund foresees a contraction in Germany with a negative 0.3% or Italy (-0.2%).
The European Union as a whole registers a growth of 3.1% and 0.5% for this year and next, while the United States stays at 1.6% and 1%. China stands, after a good decline in relation to 2021, at 3.2% and 4.4%.
Lots of turbulence. “As storm clouds gather, policymakers need to keep a steady hand.” Downside risks to the outlook remain elevated, while the policy response to address the cost-of-living crisis has become extremely challenging. The risk of monetary, fiscal or financial policy miscalibration has risen sharply at a time when the global economy remains historically fragile and financial markets are showing signs of stress.
“The health of the global economy is critically tied to the success of calibrating monetary policy, the development of the war in Ukraine, and the possibility of other supply chain disruptions linked to the pandemic,” it warns.
The Russian invasion of Ukraine has opened a severe crisis in Europe that has led to a sharp increase in the cost of living and puts obstacles to economic activity. Gas prices in the Old Continent have more than quadrupled since 2021, with Russia cutting supply to less than 20% of last year’s levels.
This raises the possibility of power shortages during the coming winter and beyond. In addition, the war has also led to higher food prices on world markets, despite the agreement to transport cereals through the Black Sea, which causes serious damage to low-income households and, especially, to countries poor.
According to the IMF, the energy crisis, especially in Europe, is not a transitory blow. The geopolitical realignment of energy supplies in the wake of Russia’s war against Ukraine is “profound and permanent.” The winter of 2022 will be a challenge for Europe, but “2023 will possibly be worse”. The entity advises that “the tax authorities of the region must plan and coordinate accordingly.”
This is a volatile period. Inflation is now estimated at 8.8% in 2022, but falls to 6.5% in 2023. “We expect inflation to peak at the end of 2022, but it will remain elevated for a longer period of time than than initially forecast, falling to 4.1% in 2024”, he points out.
This persistent and widespread pressure from inflation has triggered a rapid and synchronized increase in interest rates, a tightening of monetary conditions, as well as a sharp appreciation in the value of the dollar against other currencies. The tightening of monetary policy and financial conditions will help lower demand and gradually contribute to subduing inflation. But price pressure is proving stubborn and a serious concern for lawmakers.
Price pressure is the most immediate threat to current and future prosperity, squeezing real incomes and undermining macroeconomic stability. Central banks around the world are now focused on restoring price stability and the pace of tightening has accelerated considerably: “There are risks of both over-tightening and under-tightening.”
A lax adjustment would entrench inflation and erode the credibility of central banks and the expectations of curbing the rise in prices. “As history teaches us, this would only increase the eventual cost of bringing inflation under control.” But tightening too much would push the global economy into an unnecessary harsh recession.
China’s frequent Covid lockdowns have taken a toll on its economy, especially in the second quarter of 2022. In addition, the real estate sector, which accounts for a fifth of economic activity, is rapidly weakening. Given the size of the Chinese economy and its global importance in the supply chain, it can have a strong impact on global trade.
The external environment is challenging for many emerging markets and developing economies. The sharp appreciation of the US dollar adds significant domestic pressure in those countries, with a very worrying level of price increases. Capital flows have not yet recovered and many of these economies remain over-indebted. The 2022 shock will reopen economic wounds that had only partially healed after the pandemic.
Given the situation, the Fund encourages countries where the pandemic has receded to start rebuilding fiscal buffers. “As the pandemic has illustrated, fiscal space is essential to deal with crises. Countries with more fiscal space were better able to protect households and businesses.”
