The head of the IMF warns that one third of the world economy will be entering a recession this year, as strong economies like the U.S, E.U and China have slowed down. Central banks continue to raise interest rates to bring rampant inflation under control.
Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), has shared her thoughts on the global economy going into the new year, and it is bad news. The IMF chief warns that 2023 is going to be tougher than last year due to three of the largest economies – U.S, E.U and China – experiencing weakened economic activity.
Among the three, the U.S economy is said to be the most resilient and may avoid going into a recession due to its strong labour market. However, the IMF boss says this is a mixed bag because a strong labour market will hamper progress made by the Federal Reserve in bringing down inflation to its 2% target rate. Last year, U.S inflation hit its highest level in four decades at 9.1%, which led to the Fed enforcing one of the toughest rate tightening policies since the 1980s. In March, the central bank raised its interest rate on the U.S dollar from near zero to the current rate of 4.50%, which is the fastest and largest rate hike since the 2008 financial crisis. Last month, Federal Reserve officials said that more increases should be expected this year as it continues to fight to get inflation under control.
The Fed is expecting the job markets to slow down to help it undercut price pressures in the economy. U.S Unemployment rates currently stand at 3.7% – close to the lowest since the 1960s.
Georgieva believes that the European and British economies were hit hard by the war in Ukraine and the Covid-19 pandemic. Soon after the invasion, EU member states sanctioned Russia and stopped fossil fuel imports from the country. Russia was Europe’s largest supplier of energy. This saw many countries that were starting to rise from the aftermath of the Covid-related shutdowns, fall into deeper trouble with the onset of the cost of living crisis. Rising prices for fuel, energy, food and housing is causing havoc across Europe and the United Kingdom. The IMF boss warns that the EU will enter a period of long recession that may last up until the end of 2024.
Last month, in a desperate effort to curb rising inflation, European energy ministers agreed to issue a price cap on gas prices. At the same time, the European Central Bank (ECB) raised its interest rates on the euro by 50 basis points to reach 2%. Policymakers are predicting the ECB to raise rates by 100 bps this year to hit 3%, acknowledging that inflation would not fall to the central bank’s target of 2% until the end of 2025.
Meanwhile, in the UK, the Bank of England (BoE) raised its borrowing interest rate on the pound sterling by 50 bps to 3.5% in December – ninth rate hike of the year and the highest since 2008. The decision came in response to the Consumer Price Index (CPI) showing inflation at 10.7% in the 12 months to November, which remains at a 40-year high despite the BoE’s efforts to get it under control. The UK’s unemployment rate currently stands at 3.7%. Economists are predicting interest rates to hit 4.5% by the end of the second quarter of the year. In November, BoE revealed that the British economy has officially entered a recession.
Regarding China, the IMF chief said the country’s economic activity slowed down drastically in 2022 due to its stringent zero-Covid policies. The monetary authority noted that China’s growth was likely to drop below international levels for the first time ever, resulting in the country bringing down the world economy with it.
Things aren’t looking great for emerging economies either. Georgieva said that these countries will be hit hard by rising interest rates and appreciation of the dollar, leading to a “devastation”. The IMF expects one third of the world economy to be in recession this year.
“My message is, don’t think that we are going to go back to pre-Covid predictability. More uncertainty, more overlap of crises waits for us. We have to buckle up and act in that more agile, precautionary manner,” said Georgieva.