The world could soon be on the brink of a global recession as the economies of the U.S., China and Europe slowed more sharply than anticipated.
The world’s three largest economies are stalling, with important consequences for the global outlook. Inflation is a major concern.
I.M.F. downgraded its global growth forecasts from its April projections, predicting that output would 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.
The world may soon be teetering on the edge of a global recession, only two years after the last one, the outlook for the global economy is “increasingly gloomy.
I.M.F. 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.
Inflation is also rising more rapidly and broadly than the I.M.F. 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 Fed 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 I.M.F. 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.
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 economic storm facing the world is the result of diminished consumer spending power in the United States, the impact 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.
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.
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. The general assessment as to whether the economy is in a recession overall is a little bit more complex.
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.