• One third of global economy may tip into contraction next year
  • Caution comes as leaders gather in Washington for IMF meetings

The International Monetary Fund warned of a worsening outlook for the global economy, highlighting that efforts to manage the hottest inflation in decades may add to the damage from the war in Ukraine and China’s slowdown.

The IMF cut its forecast for global growth next year to 2.7%, from 2.9% seen in July and 3.8% in January, adding that it sees a 25% probability that growth will slow to less than 2%.

The risk of policy miscalculation has risen sharply as growth remains fragile and markets show signs of stress, the IMF said Tuesday in its World Economic Outlook. About one third of the global economy risks contracting next year, it said, with the US, European Union and China all continuing to stall.

The impact of the Federal Reserve’s monetary policy tightening will be felt globally, with the dollar’s strength versus currencies in emerging and developing markets adding to inflation and debt pressures.

Weaker Expansion

The IMF’s growth outlook has been cut sharply since the start of 2022

Source: IMF World Economic Outlook

“The worst is yet to come, and for many people 2023 will feel like a recession,” the lender’s chief economist, Pierre-Olivier Gourinchas, wrote in a foreword to the report. “As storm clouds gather, policymakers need to keep a steady hand.”

The warning comes as finance and central bank chiefs gather in Washington for the lender’s annual meetings. Speaking at the opening on Monday, IMF Managing Director Kristalina Georgieva cautioned that higher borrowing costs in the US, the world’s largest economy, are “starting to bite,” while World Bank President David Malpass flagged the “real danger” of a global recession.

To be sure, the IMF sees greater risk from central banks doing too little rather than too much amid persistent price pressures, a mistake that would cost them credibility and only increase the eventual cost to bring prices under control. 

Inflation will peak later this year, the IMF forecast, with an annual rate of 8.8%, and will remain elevated for longer than previously expected, only slowing to 6.5% next year and 4.1% by 2024.

Global Inflation in 2023

Annual change in consumer prices

Source: International Monetary Fund

Note: Data for distinct economies

For this year, the IMF sees world growth of 3.2%, unchanged from July but down by more than a quarter from the 4.4% projected in January, before Russian President Vladimir Putin ordered an invasion of Ukraine, which disrupted food and fuel flows and exacerbated inflation globally. 

The euro area economy will grow just 0.5% in 2023, according to the fund, with the bloc seeing the sharpest outlook reduction among global regions. Germany, Italy and Russia all will see their economies shrink.

Though the energy crisis in Europe triggered by Russia cutting deliveries of natural gas will challenge the continent this winter, next winter is likely to be even more difficult, according to the fund. 

As countries deal with the energy crisis that’s elevating prices, Gourinchas urged  nations not to implement fiscal policy that is going to be at cross purpose with what the central banks are trying to do. 

Source: International Monetary Fund

Note: Data for distinct economies

There’s a risk that a stormy global economy spur investors to safe-haven assets like US Treasuries, pushing the dollar even higher and pressuring the debt of emerging and developing nations.

“Now is the time for emerging market policymakers to batten down the hatches,” Gourinchas wrote. That includes eligible countries requesting access to precautionary support from the IMF.

The world needs progress toward orderly debt restructurings through the Common Framework created by the Group of 20 largest economies for the most affected low-income nations, Gourinchas wrote.

“Time may soon be running out,” he said.

— With assistance by Zoe Schneeweiss, Reade Pickert, Alix Steel and Dani Burger

(Updates with comment from IMF chief economist in 13th paragraph.)