The International Monetary Fund downgraded its 2023 outlook for the world economy, suggesting that next year “will feel like a recession” for many thanks to central bank reactions around the world.
The lending agency of 190 countries said Tuesday morning that global economic growth would be a meagre 2.7 per cent in 2023, down from the 2.9 per cent they’d estimated in July. For comparison, the world economy grew by six per cent in 2021. The IMF cited Russia’s war in Ukraine, chronic inflation pressures, punishing interest rates and the lingering consequences of the global pandemic.
“The worst is yet to come,” said IMF chief economist Pierre-Olivier Gourinchas.
The 2023 growth estimate in Canada thus shrunk to 1.5, down three-tenths of a percentage point from the last estimate made in July. Canada’s growth estimate for 2022, meanwhile, fell to 3.3 per cent from July’s 3.4 per cent.
The IMF left unchanged the modest 2022 global growth estimate of 3.2 per cent.
Economies stalling
Next year’s growth estimate for the United States — Canada’s largest trading partner — shrunk to just one per cent. Their economy is stalling, along with those of China and Europe, said Gourinchas.
The 19-country Euro-bloc will grow only 0.5 per cent in 2023 as it reels from the Russian invasion of Ukraine and resulting energy prices, predicted the IMF.
China, a co-founding member of the IMF, was predicted to see the sharpest contraction of 3.2 per cent this year and 4.4 per cent in the next, down from 8.1 per cent in 2021. Business disruptions caused by Beijing’s Draconian zero-COVID policy and crack-down on excessive real estate lending will be to blame, said Gourinchas.
Each country is squaring up against the consequences of the 2020 COVID-19 pandemic, which brought the world economy to a halt and necessitated massive government spending and low borrowing rates. Those measures fuelled a surprisingly quick and quality recovery from the pandemic recession. It comes, however, at a high cost.
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Central banks are today dramatically raising interest rates to stem inflation risk and ease consumer supply chain pressure. Canada’s central bank raised its shot-term rate five times so far throughout 2022. This risks a sharp economic slowdown and recession.
Likewise, higher borrowing rates in the United States have supported global investment in the country and raised the value of the U.S. dollar, thus making U.S. exports more expensive and heightening inflation pressures world wide.
An overly aggressive U.S. central bank could “drive the world economy into an unnecessarily harsh contraction,” said Maurice Obstfeld, a former IMF chief economist who now teaches at the University of California, Berkeley.
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