Facing a Darkening Economic Outlook: How the G20 Can Respond

IMF Blog, July 13, 2022

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Author: Kristalina Georgieva
Date: July 13, 2022
When the G20 last met in April, the IMF had cut its global growth forecast to 3.6 percent for this year and next; since then multiple downside risks have materialized and the outlook has darkened.
Recent developments worsening the outlook:
- War in Ukraine: worsening human tragedy and economic impact, especially through commodity price shocks.
- Inflation: higher than expected and broadened beyond food and energy.
- Monetary policy: major central banks have announced further monetary tightening.
- Pandemic disruptions: continuing pandemic-related disruptions, especially in China.
- Supply chains: renewed bottlenecks hampering economic activity.
Near-term projection: weak second quarter implied by recent indicators and a further downgrade to global growth for both 2022 and 2023 will be projected in the World Economic Outlook Update later this month.
Risk scenario highlighted: further disruption in natural gas supply to Europe could plunge many economies into recession and trigger a global energy crisis.
Summary assessment: It is going to be a tough 2022—and possibly an even tougher 2023, with increased risk of recession.

Findings:

Inflation has reached multi-decade highs in many countries, with both headline and core inflation continuing to rise.
Monetary tightening has become increasingly synchronized:
- 75 central banks—or about three-quarters of the central banks tracked—have raised interest rates since July 2021.
- On average, they have done so 3.8 times.
- For emerging and developing economies, the average total rate increase has been 3 percentage points—almost double the 1.7 percentage points for advanced economies.
Portfolio flows and exchange rate pressures:
- Emerging markets experienced a fourth consecutive month of outflows in June, the longest such run in seven years.
- The appreciation of the US dollar has coincided with these portfolio outflows.

Policy recommendations:

Most central banks must continue to tighten monetary policy decisively, especially where inflation expectations are de-anchoring.
Clear communication of policy actions to preserve credibility and manage expectations.
Where external shocks are highly disruptive, policymakers should be ready to use:
- Foreign exchange interventions.
- Capital flow management measures in a crisis scenario.
Pre-emptively reduce reliance on foreign currency borrowing where debt levels are high.
IMF support measures:
- Advice on managing reserve assets.
- Technical assistance to strengthen central bank communications.
Overarching goal: get everyone safely to the other side of this tightening cycle.

Findings:

Countries with elevated debt levels will need to tighten fiscal policy to reduce borrowing burdens and complement monetary efforts.
In countries where recovery is more advanced, shifting away from extraordinary fiscal support will help tamp down demand and price pressures.
Some people will need more support, not less, due to high energy or food prices.
Sovereign FX bond yields:
- Have reached more than 10 percent in around a third of emerging economies—close to highs after the global financial crisis.
Debt distress prevalence:
- 30 percent of emerging market countries are in or near debt distress.
- 60 percent of low-income nations are in or near debt distress.

Policy recommendations:

Use targeted and temporary measures to support vulnerable households, e.g., direct cash transfers rather than distortionary subsidies or price controls.
Ensure new measures are budget-neutral—funded through new revenues or expenditure reductions elsewhere, without incurring fresh debt.
Structural reforms over the medium-term to bolster growth, including labor market policies to increase workforce participation, especially for women.
Reduce debt urgently, especially for economies with FX-denominated liabilities vulnerable to tightening global financial conditions.

IMF actions and mechanisms:

Offer tailored analysis and advice.
More agile lending framework: emergency financing, increased access limits, new liquidity and credit lines.
Last year’s historic SDR allocation of $650 billion.

Debt treatment:

Urgent need to improve and implement the G20’s Common Framework for debt treatment.
Large lenders—both sovereign and private—need to step up.
Critical creditor committee meetings for Chad, Ethiopia, and Zambia are expected to deliver as much progress as possible this month.

Findings:

Coordinated international action is urgently needed to avoid potential crises and boost growth and productivity.
Recent progress exists in areas including taxation, trade, pandemic preparedness, and climate change.
G20’s new $1.1 billion fund for pandemic prevention and preparedness cited as an example of what is possible.
The cost-of-living crisis impact:
- Pushing an additional 71 million people into extreme poverty in the world's poorest countries, according to the United Nations Development Programme.
Rising risks: social instability, hunger, malnutrition, and migration as food and energy concerns increase.
Conditions in many African countries are particularly difficult:
- Higher food prices are acutely felt where food accounts for a higher share of income.
- Inflation, fiscal, debt and balance of payments pressures are intensifying.
- Many African countries are largely shut out from global financial markets and lack large domestic markets.

Policy recommendations and international actions:

Wealthier countries should provide urgent support for those in need, including new bilateral and multilateral financing, especially through the World Food Programme.
Reverse recently imposed restrictions on food exports immediately because such restrictions are harmful and ineffective in stabilizing domestic prices.
Strengthen supply chains and help vulnerable countries adapt food production to cope with climate change.
IMF contributions:
- Working with international partners through a new multilateral food security initiative.
- The Resilience and Sustainability Trust will provide $45 billion in concessional financing for vulnerable countries to address longer-term challenges such as climate change and future pandemics.
- IMF readiness to do more.

As the G20 meets, the needed spirit is captured by the Balinese phrase menyama braya, “everyone is a brother or sister.”
The IMF emphasizes decisive action, strong international cooperation, and leadership by the G20 to navigate the “sea of troubles.”

IMF Blog — Facing a Darkening Economic Outlook: How the G20 Can Respond (Kristalina Georgieva, July 13, 2022)

G20 Surveillance Note
- G20 Surveillance Note (Markdown version)
- G20 Surveillance Note (PDF)