The engines of the global economy continue to cough. After a remarkable rebound in 2021, global gross domestic product (GDP) growth is expected to slow more than expected. In the latest global outlook update released on Tuesday July 26, the IMF revised its global GDP growth figures for 2022 to 3.2% from 3.6% in April (- 0.4 points). For 2023, activity should increase by 2.9% against 3.6% previously (-0.7 points).
“We may be on the eve of a global recession just two years after the last one,” The institution’s chief economist Pierre-Olivier Gourinchas warned in a press briefing. “The world’s leading economies are experiencing a sharp slowdown”added the French economist.
After two long years of the pandemic, the world economy is facing high inflation. The consumer price index could rise to 8.3% in 2022 before falling back to 5.7%. The tightening of monetary policies in most of the developed countries will help to control the rise in energy and food prices, but the risk of rising unemployment is intensifying.
In the United States, rising interest rates slowed growth
Bad signals are getting darker in the United States. After a strong start to 2021, the US economy is gearing up for a harder landing than expected. The growth of activity may drop from 5.7% in 2021 to 2.3% in 2022 and 1% in 2023. For 2022 (-1.4%) and 2023 (-1.3%), this is the largest downward revision. in the Fund’s projections last spring.
By aggressively tightening monetary policy, the Federal Reserve (FED) is putting a serious brake on the economy across the Atlantic. Although President Joe Biden and Treasury Secretary Janet Yellen rejected the risk of a recession in 2022, more and more economists expect a decline in GDP in 2023. In June, inflation accelerated to 8.6% to 9.1% YoY, again driven by energy prices.
While the Fed may announce a further rate hike of 75 basis points on Wednesday, July 27, some economists are questioning the need to further tighten monetary policy, at a time when fuel prices run out of steam. “In 2021, the Fed placed too much emphasis on the full employment objective, not enough on the price stability objective. One may wonder if it is not making a symmetrical error now. Soon, the inflation may begin to decline, just as unemployment rises,” Explained the chief economist of ODDO-BHF, Bruno Cavalier in a recent note.
In China, economic growth has stalled
After becoming the epicenter of the pandemic, China’s growth has struggled to regain its pre-crisis pace. The IMF expects GDP to increase by 3.3% in 2022 (-1.1% compared to April) and 4.6% in 2023 (-0.5% compared to April). The first half of 2022 was marked by several anti-Covid restrictions in China that severely disrupted the country’s manufacturing activity, especially, and by extension, global activity. A new epidemic outbreak, combined with the Chinese government’s zero-Covid policy, could cause a slowdown in China’s economy, leading to “Significant global impacts”, according to the IMF, which also mentions a risk linked to the crisis in China’s real estate sector.
On Russia’s side, the war has caused the economy to experience a brutal recession estimated at -6% this year. But this fall was less severe than expected according to the IMF, which counted a decline of 8.5% in April. It appears that the consequences of Western sanctions aimed at strangling the regime of Vladimir Putin will be less significant than expected in 2022. On the other hand, theTheir effects should be felt more than expected in 2023, the year in which the IMF expects a recession in the Russian economy of 3.5%, ie 1.2 points lower than previous forecasts.
Europe on the front line of the war in Ukraine
The shock wave of the war in Ukraine continues to reverberate across the European continent. Five months to the day after Russia’s invasion of Ukrainian territory, tensions have not subsided between European leaders and the Moscow regime.
The threat of a Russian gas cut in the Old Continent will throw the economy into many difficulties. In this context, IMF economists revised their projections for the euro zone downwards compared to April. After jumping to 5.4% in 2021, GDP growth could rise to 2.6% this year from 2.8% in the spring. More importantly, the Washington-based institution significantly revised its figures for 2023 to only 1.2% against 2.3% in April (-1.1%).
Energy shortages on the European continent next winter will put the economy in troubled waters. In fact, although the States are planning plans to reduce energy consumption in many sectors, many countries are still dependent on Russian gas. This can lead to worsening outcomes due to the level of interdependence among countries.
Germany in red
Among the euro zone’s major powers, the most dramatic change has to do with Germany. GDP growth could thus fall from 2.9% in 2021 to 1.2% in 2022 and 0.8% in 2023. In the context of the conflict in Ukraine, the IMF suddenly changed its figures for 2022 (-0 , 9%) and 2023 (- 1.9%). German industry, which is heavily dependent on Russian gas, has been going through a violent zone of turmoil since the spring. This adds to supply difficulties from China and Asia. Due to the heavy industrial burden on the economy across the Rhine, general activity was severely penalized.
In France, growth could fall to 2.3% in 2022 against the 2.9% expected in the spring. After a strong rebound of 6.8% in 2021, the activity engines are running out of steam in France. Household consumption fell in the first quarter, weighed down by the effects of inflation. Even though the government is planning measures to limit the effect of price increases on the purchasing power of households, the poorest have recorded a decrease in their standard of living due to the under-indexation of wages that are just above the minimum wage. On the business side, some sectors fear tensions in their cash flow from the start of the school year, especially trade and industry.
In southern Europe, Italy’s economy is slowing more than expected. After the growth of 6.6% in 2021, the activity should slow down to 3% in 2022 and 0.7% in 2023. The recent resignation of the President of the Council, Mario Draghi, after several failures in the Parliament risks destabilizing the political situation in Rome, with new elections scheduled for the fall.
The recent tightening of monetary policy by the European Central Bank (ECB) has revived the memory of the sovereign debt crisis of 2012, in the euro zone, where Italy suffered the most. As for Spain, growth should also run out of steam, falling from 5.1% in 2021 to 4% in 2022 and 2% in 2023. The end of the year promises to be more difficult in the Old Continent.