The International Monetary Fund again downgraded its forecast for the global economy with a sharp warning: “The worst is yet to come, and for many people 2023 will feel like a recession.”
The agency said Tuesday that it expects global growth to slump to 2.7% next year, with a 25% probability it could fall below 2%. That compares with projected growth of 3.2% this year, reports CNN.
The figure for next year is 0.2 percentage points lower than the IMF’s July outlook, as Russia’s war in Ukraine, high inflation and a slowdown in China drag on activity.
“More than a third of the global economy will contract this year or next, while the three largest economies — the United States, the European Union, and China — will continue to stall,” said Pierre-Olivier Gourinchas, the IMF’s chief economist.
The prospects for the global economy as outlined by the IMF are the third weakest since 2001, behind only the 2008 financial crisis and the worst phase of the coronavirus pandemic. Global growth has fallen below 2% just five times since 1970.
The IMF believes that global inflation will peak late this year, but will “remain elevated for longer than previously expected,” even as central banks work aggressively to bring it under control.
Western countries last week ratcheted up their criticism of China, the world's largest bilateral creditor, as the main obstacle to moving ahead with debt restructuring agreements for the growing number of countries unable to service their debts.
US Treasury Secretary Janet Yellen said on Friday that high inflation, tightening monetary policies, currency pressures and capital outflows were increasing debt burdens in many developing countries, and more progress was urgently needed, reports Reuters.
She said she discussed those issues during a dinner with African finance ministers and in many other sessions. The Group of Seven rich nations also met African finance ministers, who worry that the focus on the war in Ukraine is draining resources and attention from their pressing concerns.
"Everyone agrees Russia should stop its war on Ukraine, and that would address the most significant problems that Africa faces," Yellen told reporters at the International Monetary Fund and World Bank annual meetings in Washington.
But she said a more effective debt restructuring process was also needed, and China had a big role to play.
"Really, the barrier to making greater progress is one important creditor country, namely China," she said. "So there has been much discussion of what we can do to bring China to the table and to foster a more effective solution."
As China is the missing piece in the puzzle of a number of debt talks under way in developing markets, the Group of 20 launched in 2020 a Common Framework to bring creditors such as China and India to the negotiation table along with the IMF, Paris Club and private creditors.
Zambia, Chad and Ethiopia have applied to restructure under this new, yet-to-be tested mechanism. Sri Lanka is set to start talks with bilateral creditors including China after a $2.9 billion staff level agreement with the IMF under a similar platform. The Paris Club creditor nations last month reached out to China and India seeking to coordinate closely on Sri Lanka's debt talks, but are still awaiting a reply.
The world's poorest countries face $35 billion in debt-service payments to official and private-sector creditors in 2022, with more than 40% of the total due to China, according to the World Bank.
Spanish Finance Minister Nadia Calvino, who chairs the IMF's steering committee, told Reuters in an interview on Thursday that there was increasing concern about China not participating fully in debt relief efforts, noting that China had not sent officials to participate in person at this week's IMF and World Bank meetings.
"China is a necessary partner. It's indispensable that we have them in the room and in the discussions when it comes to debt relief," Calvino said, adding that many heavily indebted countries were also being hit hard by inflation and climate shocks.
German Finance Minister Christian Lindner also joined the growing criticism of China's lack of timely participation in debt restructuring for lower-income countries. China has argued it would not take part in some cases unless the IMF and World Bank also took a haircut.
Lindner told reporters he regretted that China had not accepted his invitation to participate in the G7 roundtable with African countries.
Countries strengthen calls to end war
International Monetary Fund member countries on Friday issued a near-unanimous call for Russia to end its war in Ukraine, the IMF's steering committee chair said, calling the conflict the single biggest factor fueling inflation and slowing the global economy.
But Nadia Calvino, Spain's economy minister, told a news conference that Russia again blocked consensus on issuing a joint communique during a meeting of the International Monetary and Financial Committee.
Calvino said the call for an end to the war was stronger than at IMF and World Bank meetings in April as the conflict causes food and energy insecurity, rising prices and financial stability risks.
"It is very clear for just on a human level, practical level, objective level -- Stop the war. Stop the war," IMF Managing Director Kristalina Georgieva said. "This is the most straightforward way to get the world economy in better shape. Stop the war."
Georgieva's sentiments were echoed by US Treasury Secretary Janet Yellen, who said at a separate news conference that in thinking about economic responses, "it's obvious what the most important is, and everyone agrees Russia should stop its war on Ukraine."
Russia's opposition to such calls forced the IMF steering committee to issue a chair's statement, Calvino said, adding it reflected strong agreement on many economic issues.
The statement called for central banks to strive for price stability, while fiscal policy should prioritize protection of vulnerable groups from higher living costs.
"We will ensure coherence of the overall monetary and fiscal stances, with due consideration to the complementary role of structural policies in easing trade-offs," the statement said, echoing IMF advice to Britain and other countries to avoid monetary and fiscal policies working against each other.
On currencies, the statement recognized the pressures created by the strong U.S. dollar.
"Recognizing that many currencies have moved significantly this year with increased volatility, we reaffirm our commitments on exchange rates, as made in April 2021," the IMFC statement said.
Summers blasts IMF, World Bank for inaction
Former treasury secretary Larry Summers warned that world leaders are failing to do enough to prevent a possible global crisis, as rising interest rates and fallout from the war in Ukraine and the coronavirus pandemic rattle advanced and developing countries alike.
Speaking to a gathering of finance industry executives in Washington, DC, Summers blasted the International Monetary Fund and the World Bank for inaction, reports the Washington Post.
"This is the most complex, disparate and cross cutting set of challenges that I can remember in the 40 years I've been paying attention to such things," Summers said to the Institute of International Finance, an industry group.
Summers, who correctly warned early last year that inflation would become a persistent headache in the United States, said policymakers need to act on several fronts to address an "ominous" outlook: making sure financial markets operate smoothly; increasing lending and easing debt burdens for poor countries; and accelerating the transition to a low-carbon economy.
Summers said the United States should provide an additional $5 billion in funding for the World Bank over six years, which ultimately could support up to $100 billion in new lending.
The prominent economist - who spent an hour recently conversing with President Biden in the Oval Office - is no ordinary critic. As a top Treasury Department official in the Clinton administration, he helped craft the US response to financial crises in Mexico and Asia. During the latter episode, Time magazine memorably lionized him, his boss, Treasury Secretary Robert Rubin, and Federal Reserve Chair Alan Greenspan as "The Committee to Save The World."
Summers contrasted the free-spending response to Ukraine's defense needs with what he said was insufficient global action on the economic front.
"This is a moment that is extraordinary and urgent in the economic and financial sphere in the same way that it is in the security sphere," Summers said.