IMF Cuts 2023 Global Growth Forecast, Citing Inflation, War and China Slowdown

The global economy will expand 2.7% in 2023, down from 3.2% this year and 6% in 2021, the multilateral lender said Tuesday in its latest World Economic Outlook. The new forecast represents a reduction of 0.2 percentage point from its July estimate.

The IMF left unchanged its 2023 U.S. growth projection at 1%, but scaled back its 2022 forecast. The economy will expand 1.6% this year, the fund said, down from its 2.3% estimate in July, and down significantly from 5.7% last year.

Economies representing more than a third of global output will contract next year, while growth will stall in the world’s three largest economies—the U.S., the European Union and China, the IMF said.

“It’s a very difficult global environment and the worst is yet to come,” said Petya Koeva Brooks, deputy director at the IMF’s research department. “In 2023, for many countries and many people, it will feel like a recession.” 

The IMF left its 2022 global forecast unchanged from July, as a deterioration in U.S. economic prospects was offset by improvements in the outlook for the euro area, the U.K. and Russia. 

The risks to growth remain unusually large, the IMF said. Among them: central banks’ potential miscalculations as they raise interest rates to battle inflation, further U.S. dollar appreciation, more unexpected increases in energy and food prices and reduced natural-gas supplies from Russia to Europe. Others would be a banking crisis in China triggered by the property sector and a resurgence of Covid-19 or new global health scares.    

“What we see perhaps is a fundamental shift from the world of the last decades that was relatively predictable, with strong rules-based international order, low inflation, and low interest rates, to a world that is more volatile, more fragile, ” IMF Managing Director

Kristalina Georgieva

said Monday as she kicked off meetings of the fund and the World Bank in Washington this week. 

She said the current global economic slowdown is expected to wipe out $4 trillion from global growth between now and 2026, an amount roughly the size of the German economy. 

Inflation, at the highest rates in decades, poses the most significant immediate threat to the global economy by squeezing incomes and destabilizing economic activities, said IMF economists.

The IMF expects global inflation to peak this year at 8.8%, before cooling to 6.5% in 2023 and 4.1% in 2024. At 7.2%, inflation in advanced economies this year is the highest since 1982.

The U.S. Federal Reserve is raising interest rates at the fastest clip in decades to try to tame inflation by slowing growth. Central banks around the world are rapidly moving in the same direction.

The IMF urged central bankers to keep raising rates, though some analysts worry rates may be on course to climb further and faster than necessary.

IMF economists see risks to both raising rates too much or too little: Overdoing it could push the global economy into sharper downturn than needed to weaken price pressures, while stopping too soon would allow high inflation to become entrenched and require even more rate increases. 

The risks of doing too little are the more worrisome, Ms. Koeva Brooks said. “So doing the right thing now would prevent that scenario.”

The Fed’s rate rises have fueled a sharp appreciation of the U.S. dollar against most other currencies, which, in turn, has inflated the costs of imports and debt service for many countries.

Many emerging-market and developing nations, in particular, are struggling. The surging dollar and war in Ukraine are boosting their bills for imported food and energy, while their economies have yet to recover from pandemic-induced damages.

Roughly 60% of the world’s poorest nations are in or at risk of debt stress—unable to meet their financial obligations—and many governments and businesses are unable to raise capital in financial markets to refinance and raise funds needed to keep their operations running.

 In China, strict Covid-19 lockdown policies have curbed its economic growth, particularly during the second quarter of 2022. Its overextended property sector, which represents one-fifth of its economy, according to the IMF, is slowing rapidly. China’s slump is expected to add to hiccups in global supply chains and a slowdown in global trade, the IMF said.

The IMF said the global economy shrank modestly during the second quarter, by 0.1 percentage point, with output falling in China, Russia and the U.S., as well as in Eastern European countries affected by the war in Ukraine. 

The U.S. contraction reflects the Fed’s rate increases as well as the end of tax and spending policies that had propped up household incomes and bolstered businesses during the pandemic, the IMF said.  

Write to Yuka Hayashi at [email protected]