A third of the world economy will enter recession this year. This is what Kristalina Georgieva, the director of the International Monetary Fund, said in a interview with US CBS.
“2023 will be more difficult than the year we leave behind,” Georgieva said in the program Face the Nation. She foresees that the three largest economic blocs, the United States, China and the European Union, will experience a simultaneous economic slowdown.
The outlook for Europe is the worst, as the impact of the war in Ukraine and high energy prices are most felt there. According to Georgieva, half of the EU countries will experience a recession this year.
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China will grow less fast than the world economy for the first time in 40 years, thereby losing its role as the engine of global activity. Until recently, according to the IMF director, China alone accounted for a third to 40 percent of all economic growth in the world. “We don’t see that coming back anytime soon.”
Georgieva does not see the sudden reopening of the Chinese economy due to the release of the zero-Covid policy as an additional threat, because the free access of the Chinese to the labor market outweighs the loss of business due to mass illness.
US relatively unruly
The United States economy is still in the best shape, with a labor market that is surprisingly unruly. But Georgieva also notes that this is not just a win. If an economy is strong, this can make curbing high inflation more difficult. The US central bank will then have to keep interest rates higher for longer in order to reduce inflation.
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The high US interest rates are especially bad for emerging countries, which have many loans in dollars. They pay a high interest rate for this, while the exchange rate of the dollar also remains strong due to the high interest rate, making interest and repayments extra expensive. According to the IMF, 60 percent of emerging countries are already struggling with this.
The latest forecasts from the IMF, from October last year, assume global economic growth of 3.2 percent in 2022 and 2.7 percent this year. That is already considerably lower than the average growth of 3.7 percent since 1980.
Georgieva’s statements may indicate that the IMF is downgrading its interim forecast, which will be published later this month. In October, the Fund already calculated numerous scenarios in which global growth could be even more disappointing.
‘Do not weaken inflation policy’
Georgieva urges central banks, which try to fight inflation with high interest rates, not to weaken monetary policy if economic growth continues to decline. In her view, the fight against inflation would only take longer. “Our concern is that if the central banks are too shocked by the declining economic growth, inflation will remain higher for longer. You can only stop if there is a credible drop in inflation.”
Georgieva also warns against dividing the world into two economic blocs, around China and the United States. She acknowledges that an “excessive dependence” has emerged, which the pandemic has painfully exposed, and that the concern for security in global supply chains is understandable. But let’s not throw the baby out with the bathwater. “We calculated that if inter-bloc trade alone were to disappear, it would cost the global economy $1,500 billion year over year. That would make the world poorer and less safe.”