Letter IEDI n. 1169—World Economy in Slowdown
The latest IMF outline for the global economy, released in Oct'22, predicts the continuation of the economic slowdown, from a world GDP growth of 6.1% in 2021 to 3.2% in 2022 and then to 2.7% in 2023. In relation to the scenario of Jul'22, the IMF cut its projection for 2023 by 0.2 percentage point. As a result, the performance of the 2022–2023 biennium distances itself from the average of the last twenty years (3.6% in 2000–2021). World trade, which grew 10.1% in 2021, is not expected to exceed 2.5% in 2023.
This is basically a result of difficulties in the three largest economies in the world, the United States, China and the Euro Area, due to the materialization of risks previously identified by the Fund:
• deterioration in global financial conditions due to expectations of higher increases in base interest rates by major central banks to curb inflation;
• further deceleration of the Chinese economy due to the zero COVID-19 policy and the worsening crisis in the real estate sector;
• the adverse impact of the war in Ukraine due to the sharp reduction in Russia's natural gas supply to Europe.
Although this scenario does not include a contraction in global GDP or global GDP per capita, a technical recession—that is, negative growth for two consecutive quarters—is expected in the period 2022–2023 in about 43% of economies, which represent more than 1/3 of global GDP.
For advanced countries, the IMF estimates that GDP growth will fall by half this and next year, from 5.2% in 2021 to 2.4% in 2022 and to 1.1% in 2023. The American economy will experience the biggest slowdown: from 5.7% in 2021 to 1.6% in 2022, due to the fall in real household income and higher interest rates, which depress consumption and residential investment. The loss of dynamism will continue in 2023, but to a lesser extent: 1.0%.
In the euro area, the slowdown will be stronger in 2023, when growth is forecasted to be only 0.5% compared to 2.6% in 2022. In the United Kingdom, the predicted deceleration is also significant, from 3.6% in 2022 to a mere 0.3% in 2023. However, for Japan, the IMF expects a continuation in the pace of GDP expansion, around 1.7% in both 2022 and 2023. Thus, it should be emphasized that after decades lagging behind in the growth ranking of advanced countries, the Japanese economy should occupy the first position in 2023.
As for emerging and developing countries, the IMF notes a greater deceleration than in the global financial crisis. The increase in this group's GDP is expected to go from 6.6% in 2021 to 3.7% in 2022, remaining at the same pace in 2023. In emerging and developing Asia, the projected expansion for 2022 is 4.4%, that is, well below the result of 7.2% in 2021. In 2023, there should be an acceleration to 4.9%, under the influence of the Chinese economy.
In emerging and developing Europe, the region most affected by the war in Ukraine, the IMF forecasts the worst performance: stagnation in 2022 and very low growth in 2023, of only 0.6%. The anemic average performance of the region reflects, above all, the expected contraction both in Russia, of -3.4% in 2022 and -2.3% in 2023, and in Ukraine, of -35% in 2022.
Latin America and the Caribbean, in turn, will be the developing region with the second worst economic performance, decelerating from 6.9% in 2021 to 3.5% in 2022 and 1.7% in 2023, mainly due to its two main economies, Brazil and Mexico.
The growth forecast for Brazil in 2022 was revised upwards by the IMF, going from 1.7% in the Jul'22 outlook to 2.8% in the Oct'22 scenario, but the figure for 2023 was reduced from 1.1% to 1.0%. That is, next year the dynamism of our economy should be only 1/3 of the pace of 2022. For Mexico, the slowdown should also be important, but not as strong as that of Brazil, going from 2.1% in 2022 to just over half of that in 2023: 1.2%.
The growth forecast for sub-Saharan Africa in 2022 is slightly higher than that of Latin America and the Caribbean, at 3.6%, and is expected to remain practically at the same level in 2023 (3.7%). For the Middle East and Central Asia, projected growth is 5% in 2022, the highest among emerging and developing regions due to the favorable scenario for oil-exporting economies and a lower than expected impact of the war in Ukraine on the economies of the Caucasus and Central Asia. An increase of 3.6% is expected in 2023, if the projections of falling oil prices and global deceleration are confirmed.
The risk balance of the current scenario, according to the IMF, has a negative bias. Overall, risks are high in the face of the overlapping adverse effects of the war in Ukraine, contractionary monetary policies to combat inflation, and the protracted effects of the pandemic.
The IMF points out eight risk factors that, if materialized, can further depress global growth and keep inflation high for longer: errors in the calibration of monetary policy, divergent trajectories of monetary policies in advanced economies and maintenance of the strong dollar; persistence of inflation; debt crises in vulnerable emerging economies; interruption of Russian gas supply to Europe; emergence of new variants of COVID-19; and fragmentation of the global economy making international cooperation difficult.
To put the global economy back on a benign path of low inflation and sustainable and inclusive growth, the IMF recommends a set of policy initiatives with immediate as well as medium and long-term impacts, among which:
• defining inflation-fighting as a priority;
• protecting the most vulnerable population;
• removing the risks of a reemergence of the pandemic;
• improving the sovereign debt resolution framework;
• implementing preventive measures to cope with more restrictive financial conditions, including measures to manage capital flows;
• applying climate policies and strengthening international cooperation.