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World may be heading toward recession, IMF warns

If the thicket of threats continues to intensify, the world economy faces one of its weakest years since 1970, a period of intense stagflation across the globe.

World may be heading toward recession, IMF warnsA grain factory on the outskirts of Lviv, Ukraine, on Friday, July 22, 2022. Russia's invasion of Ukraine has created worldwide food and energy shortages. (Image/The New York Times)

Written by Alan Rappeport

The world could soon be on the brink of a global recession as the economies of the United States, China and Europe slow more sharply than anticipated amid a collision of crises, the International Monetary Fund warned Tuesday.

In an update of the World Economic Outlook, the IMF said economic prospects had darkened significantly in recent months as war in Ukraine, inflation and a resurgent pandemic inflicted pain on every continent. If the thicket of threats continues to intensify, the world economy faces one of its weakest years since 1970, a period of intense stagflation across the globe.

“The world may soon be teetering on the edge of a global recession, only two years after the last one,” Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote in a blog post accompanying the report. Put simply, the outlook for the global economy is “increasingly gloomy,” he wrote.

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The IMF downgraded its global growth forecasts from its April projections, predicting that output will fall to 3.2% in 2022, from 6.1% last year. Growth is expected to slow even further next year as central banks around the world raise interest rates in an effort to tame inflation by cooling their economies.

Inflation is also rising more rapidly and broadly than the IMF anticipated earlier this year. It now expects prices to rise 6.6% in rich countries and 9.5% in emerging markets and developing economies.

The international group also warned of another problem that could emerge as the Federal Reserve raises interest rates. Higher rates are expected to further strengthen the U.S. dollar as investors plow into Treasury bonds that offer lucrative returns. The IMF said inflation in emerging markets could be amplified as the appreciation of the dollar made the imports that they bought with their local currencies more expensive.

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Poor countries are already struggling to cope with a food crisis, as exports of grains and cooking oils from Russia and Ukraine have been disrupted by the war, fueling a surge in food costs and raising fears about the prospects of famine and social unrest.

“The risks to the outlook are overwhelmingly tilted to the downside,” the IMF said.

The economic storm facing the world is the result of diminished consumer spending power in the United States, the effects of Russia’s invasion of Ukraine on Europe’s economies, and the property crisis and lockdowns in China, where Beijing continues to take severe measures to contain coronavirus outbreaks.

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The IMF underscored that its forecasts were subject to considerable uncertainty and that more downgrades could come. It pointed to the prospect of a sudden shutdown of Russian gas flows to Europe, the stubborn persistence of inflation and more widespread lockdowns in China as looming threats.

“Under this scenario, both the United States and the euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world,” Gourinchas said.

According to the report, the likelihood of a global recession is rising. It said the probability of a recession starting in one of the Group of 7 advanced economies was now nearly 15%, four times its usual level. And it said some indicators suggested that the United States was already in a “technical” recession, which the IMF defines as two consecutive quarters of negative growth.

Data set for release Thursday is expected to show that the U.S. economy grew little or perhaps shrank in the second quarter of 2022.

At a news conference following the release of the report, Gourinchas added that the IMF was not currently projecting that the United States was in a recession and that even if its economy contracted in the second quarter, defining a recession can be complicated.

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“The recession in the way it is defined typically is looking at more than just output, you want to take into account the strength of the labor market,” Gourinchas said. “The general assessment as to whether the economy is in a recession overall is a little bit more complex.”

Gourinchas also suggested that the kind of “soft landing” that the Fed was trying to engineer — where it cools the economy just enough without setting off a recession — would be difficult to achieve. As the labor market cools, even a small “shock” could tip the economy into a recession, he said.

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“The current environment suggests that the likelihood that the U.S. economy can avoid a recession is actually quite narrow under our current projections,” he said.

The Fed is expected to raise interest rates by three-quarters of a percentage point Wednesday and policymakers have indicated they expect additional rate increases throughout the year as they try to stamp out inflation.

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The darkening economic prospects in the United States and abroad pose trouble for President Joe Biden and his Democratic Party before midterm elections that will determine who controls Congress.

On Monday, Biden made the case that the U.S. economy remained strong.

“We’re not going to be in a recession, in my view,” he said, pointing to the low jobless rate and expressing hope that growth will stay steady even as it slows. “God willing, I don’t think we’re going to see a recession.”

The IMF noted that growth in the United States had been weaker than expected in the first half of the year and that there was “significantly less momentum” in private consumption because of inflation and the expectation of higher borrowing costs.

While the IMF downgraded most economies, it projected that Russia’s would shrink less than previously expected — contracting 6% this year rather than the previously forecast 8.5%. The IMF said that Russian oil and nonenergy exports were holding up better than anticipated and that Western sanctions were not having as much bite as expected.

“Domestic demand is also showing some resilience thanks to containment of the effect of the sanctions on the domestic financial sector and a lower-than-anticipated weakening of the labor market,” the IMF report said.

The IMF said Russia’s recession this year was still significant and that its economic output could deteriorate further next year as the impact of the sanctions intensified.

First published on: 27-07-2022 at 02:39:41 pm
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