Global inflation: "The worst is yet to come": IMF gives gloomy forecast for the world economy

High inflation, the Russian war of aggression in Ukraine and the consequences of the corona pandemic are weighing heavily on the global economy.

Global inflation: "The worst is yet to come": IMF gives gloomy forecast for the world economy

High inflation, the Russian war of aggression in Ukraine and the consequences of the corona pandemic are weighing heavily on the global economy. The International Monetary Fund (IMF) lowered its global growth forecast for the coming year to 2.7 percent on Tuesday. The forecast is the weakest in around 20 years - with the exception of the forecasts during the pandemic and the global financial crisis. The decisive factor now is whether strict monetary policy will reduce inflation, it said. However, the high interest rates could trigger a debt crisis in low-income countries. The prospects for Germany are also bleak.

In its new forecast, the IMF expects global growth of 3.2 percent this year - that is no change from the forecast in July. At 2.7 percent, the forecast growth for 2023 is 0.2 percentage points lower than assumed in the summer. In the euro area, the gross domestic product (GDP) is expected to grow by only 0.5 percent in the coming year - a significant downgrade compared to the previous forecast. For Germany, the IMF even predicts a decline in economic output of 0.3 percent for 2023.

The IMF warned that more than a third of the global economy will shrink in 2023. In the three largest economies - the USA, the European Union and China - growth will stagnate. "In short, the worst is yet to come, and for many people 2023 will feel like a recession," says IMF Chief Economist Pierre-Olivier Gourinchas, describing the bleak prospects in the report's foreword. "As storm clouds gather, policymakers need to keep a steady hand."

"Inflation is expected to slow down in 2023 and 2024," the report said. This year, the IMF expects an inflation rate of 7.2 percent in the industrialized countries, i.e. 0.6 percentage points more than assumed in the summer. For the coming year, the IMF is forecasting an average inflation rate of 4.4 percent, which is also significantly higher than previously forecast. In emerging and developing countries, the inflation rate is expected to average 9.9 percent this year, an increase of 0.4 percentage points. A high rate of inflation of 8.1 percent is also expected there in the coming year.

The IMF warns that several factors could slow a slowdown in inflation. Should there be further shocks in energy and food prices, consumer prices could remain high for longer. "Energy prices are and remain particularly vulnerable given the course of the war in Ukraine and the potential flare-up of other geopolitical conflicts," the report's authors write. The central banks' role in inflation is also important. These would have to focus on curbing inflation.

The US Federal Reserve had recently braced itself against the extremely high rate of inflation with several sharp interest rate hikes. Fed Chairman Jerome Powell had made it clear that further rate hikes are to be expected. After much hesitation, the ECB initiated the turnaround towards higher interest rates in July. But further tightening of monetary policy in industrialized countries increases the pressure on borrowing costs in lower-income countries, according to the IMF. That would be fatal for the countries already badly hit by the pandemic - and would also have worldwide consequences. "A deepening debt crisis in these economies would weigh heavily on global growth and could trigger a global recession."

The IMF emphasizes that the forecasts are extremely uncertain. The future development of the global economy depends crucially on monetary policy, the course of the war in Ukraine and possible other disruptions caused by the pandemic - for example in China. The further appreciation of the US dollar should also lead to further tensions. The effects of the Russian war of aggression could further weigh on Europe. A flare-up of Corona or new global health fears could slow growth further.

NEXT NEWS