IMF Warns Of Seven Factors Which Leave Global Economy At Risk Of Perfect Storm

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Three Policy Priorities For A Robust Recovery
Three Policy Priorities For A Robust Recovery

The International Monetary Fund (IMF) has warned that seven factors are undermining growth expectations, suggesting that the worst-case scenario would cut global economic growth to 2 percent in 2023, the lowest level in over five decades.

1. War in Ukraine

In the wake of the Russian invasion of Ukraine, gas supplies from Rurssia to Europe have fallen to 40 percent of 2021 levels.

European Union governments have accused Moscow of squeezing supplies in retaliation for Western sanctions.

The IMF predicts that gas supplies will decline further.

If Moscow was to halt exports entirely, inflation would increase and European growth contract further.

2. Inflation

Again driven by the crisis in Ukraine, food and fuel prices have risen sharply, causing inflation. Governments have responded by raising the cost of borrowing, in an effort to slow demand.

The danger is that economies will stagnate, as costs continue to rise but wages remain stable.

What economists call wage-price spirals also are a possibility, as low unemployment could prompt workers to demand higher pay.

3. Recession

“The risk of recession is particularly prominent in 2023,” according to  the latest IMF report.

Several central banks have recently raised interest rates in an effort to slow demand. But if they get the balance wrong and make borrowing too expensive, consumers will simply stop buying and economies will stall.

4. Debt distress

As borrowing becomes more expensive and economic growth slows, governments in advanced economies can hope to weather the storm as consumers spend their savings.

For emerging economies, likely to see an exodus of foreign investment capital, the situation is far more complicated and could force the depreciation of several national currencies as food and fuel prices continue to rise.

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The IMF estimates that 60 percent of low-income countries are already “in or at high risk of government debt distress”.

5. China

China’s on-going struggle to contain the Covid epidemic continues to have a negative impact on the global economy.

The Chinese property sector continues to cause worry because of the high level of debt incurred by some of the leading operators.

Evergrande, for example, has been struggling to pay interest on liabilities estimated at 300 billion euros. At least a dozen other Chinese real estate companies are in similar difficulties.

Home sales in China have fallen for 11 consecutive months, leading to the contraction of a key economic sector.

6. Social instability

“Higher food and energy prices are robust predictors of unrest,” the IMF report warns.

France, for example, can expect to see disgruntled trade union forces and political opponents of an unpopular government which does not have an overall parliamentary majority attermpt to profit from a continuing rise in food and fuel prices.

7. Fragmentation

The International Monetary Fund warns that the war in Ukraine has led to global political fragmentation and created geopolitical blocs that no longer work together smoothly.

This makes cross-border payments and currency exchange more difficult.

Perhaps worst of all, warns the IMF, decreased multilateral cooperation between blocs could result in less interaction on climate change, thereby worsening the food crisis.