WB to warn ‘adverse shocks’ could push global economy into recession

The United States, China and Europe — three major world economies — are going through tough times and experiencing a slowdown, says a report.

The International Monetary Fund (IMF) chief Kristalina Georgieva said 2023 was going to be a challenging year for the entire world since the economies of the United States, China and Europe were facing an extreme crisis.

It would not be surprising to admit that at least “one-third of the world economy will be in recession in 2023”, she said, adding that even those nations that were not in recession would face its impact.

The World Bank is also concerned that “further adverse shocks” could push the global economy into recession in 2023, with small states especially vulnerable.

The warning is contained in an abstract for the bi-annual “Global Economic Prospects” report due for release on Tuesday and visible on the group’s Open Knowledge Repository website.

Even without another crisis, global growth this year “is expected to decelerate sharply, reflecting synchronous policy tightening aimed at containing very high inflation, worsening financial conditions, and continued disruptions from Russia’s invasion of Ukraine,” the World Bank said.

“Urgent global and national efforts” are needed to mitigate the risk of such a downturn as well as debt distress in emerging market and developing economies (EMDEs), where investment growth is expected to remain below the average of the past two decades, the Washington-based lender said.

“It is critical that EMDE policy makers ensure that any fiscal support is focused on vulnerable groups, that inflation expectations remain well anchored, and that financial systems continue to be resilient,” it said.

Similar demands have been made by central bankers from around the world as they aggressively raise interest rates to ease price pressures while governments support businesses and households by containing energy costs.

International Monetary Fund Managing Director Kristalina Georgieva started 2023 with a warning that the world faces “a tough year, tougher than the year we leave behind.” One-third of the global economy will be in recession because the US, the EU and China are all slowing down simultaneously, she told CBS’s ‘Face the Nation’ in an interview aired Jan.1.

For much of the global economy, 2023 is going to be a tough year as the main engines of global growth - the United States, Europe and China - all experience weakening activity, the head of the International Monetary Fund said.

The new year is going to be “tougher than the year we leave behind,” IMF Managing Director Kristalina Georgieva said on the CBS news programme “Face the Nation.”

“Why? Because the three big economies - the US, EU and China - are all slowing down simultaneously,” she said.

In October, the IMF cut its outlook for global economic growth in 2023, reflecting the continuing drag from the war in Ukraine as well as inflation pressures and the high interest rates engineered by central banks like the US Federal Reserve aimed at bringing those price pressures to heel.

Since then, China has scrapped its zero-COVID policy and embarked on a chaotic reopening of its economy, though consumers there remain wary as coronavirus cases surge. In his first public comments since the change in policy, President Xi Jinping on Saturday called in a New Year’s address for more effort and unity as China enters a “new phase.”

“For the first time in 40 years, China’s growth in 2022 is likely to be at or below global growth,” Georgieva said.

Moreover, a “bushfire” of expected COVID infections there in the months ahead are likely to further hit its economy this year and drag on both regional and global growth, said Georgieva, who travelled to China on IMF business late last month.

“I was in China last week, in a bubble in a city where there is zero COVID,” she said. “But that is not going to last once people start travelling.”

“For the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative, the impact on the region will be negative, the impact on global growth will be negative,” she said.

In October’s forecast, the IMF pegged Chinese gross domestic product growth last year at 3.2 per cent - on par with the fund’s global outlook for 2022. At that time, it also saw annual growth in China accelerating in 2023 to 4.4 per cent while global activity slowed further.

Her comments, however, suggest another cut to both the China and global growth outlooks may be in the offing later this month when the IMF typically unveils updated forecasts during the World Economic Forum in Davos, Switzerland.

Meanwhile, Georgieva said, the US economy is standing apart and may avoid the outright contraction that is likely to afflict as much as a third of the world’s economies. The “US is most resilient,” she said, and it “may avoid recession. We see the labour market remaining quite strong.”

But that fact on its own presents a risk because it may hamper the progress the Fed needs to make in bringing US inflation back to its targeted level from the highest levels in four decades touched last year. Inflation showed signs of having passed its peak as 2022 ended, but by the Fed’s preferred measure, it remains nearly three times its 2 per cent target.