WEO Press Briefing Annual Meetings 2022
IMF News, October 11, 2022
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- Published: October 11, 2022
Global outlook and headline projections
- Global growth forecast for this year is unchanged, at 3.2 percent.
- Projection for 2023 is lowered to 2.7 percent, 0.2 percentage points lower than the July forecast.
- Countries accounting for a third of the global economy are expected to contract this year or next.
- The three largest economies — the United States, China, and the euro area — will continue to stall.
- Global inflation is now expected to peak at 9.5 percent in the third quarter of 2022 before decelerating to 4.1 percent by 2024.
- Global core inflation rose from an annualized monthly rate of 4.2 percent at the end of 2021 to 6.7 percent in July for the median country.
Major forces shaping the outlook
- Three powerful forces: the Russian invasion of Ukraine; the cost‑of‑living crisis from persistent and broadening inflation pressures; and the slowdown in China.
- Specific country projections highlighted:
- United States: growth slowing to 1 percent in 2023 due to tightening monetary and financial conditions.
- China: 2023 growth forecast lowered to 4.4 percent because of a weakening property sector and continued lockdowns.
- Euro area: growth reduced to 0.5 percent in 2023, with the energy crisis imposing a heavy toll.
Inflation, monetary policy, and trade‑offs
- Central banks are “laser‑focused” on restoring price stability; pace of tightening has accelerated sharply.
- Risks of policy miscalibration:
- Undertightening could entrench inflation, erode credibility of central banks, and increase the eventual cost of bringing inflation under control.
- Overtightening risks pushing the global economy into an unnecessarily harsh recession and creating financial market adjustment problems.
- Guidance:
- Central banks should “stay the course” — continue the path toward monetary normalization rather than pausing prematurely.
- Monetary policy should be firmly focused on taming inflation while financial policy helps ensure market stability where necessary.
Fiscal policy principles and the energy crisis
- Fiscal policy should not work at cross‑purpose with monetary authorities’ efforts.
- The energy crisis (especially in Europe) reflects a broad and permanent geopolitical realignment of energy supplies; winter 2023 likely worse than winter 2022.
- Price signals are essential to curb energy demand and stimulate supply; warnings against price controls, untargeted subsidies, or export bans because they are fiscally costly and lead to misallocation and rationing.
- Fiscal policy should aim to protect the most vulnerable through targeted and temporary transfers.
- Fiscal policy can strengthen resilience by investing in productive capacity, human capital, digitalization, green energy, and supply chain diversification.
Downside risks, adverse scenarios, and probabilities
- Downside risks remain elevated (monetary, fiscal, and financial miscalibration; further escalation of the war in Ukraine; persistent inflation if labor markets remain tight).
- Risk assessment around baseline: with 25 percent probability global growth next year could slow to below 2 percent (a historically low level seen five times since 1970).
- Adverse scenario: if many risks materialize, global growth would decline to 1.1 percent, with quasi‑stagnant income per capita next year.
- Likelihood of such an adverse scenario estimated around 10 to 15 percent.
Exchange rates, dollar strength, and spillovers
- The dollar is at its strongest since the early 2000s, driven mostly by fundamental forces (U.S. monetary tightening and the energy crisis).
- Effects of dollar strength:
- Raises prices of imported goods invoiced in dollars, increasing inflation pressures elsewhere.
- Tightens financial conditions for corporates and governments with dollar debt.
- Policy response recommended:
- Calibrate monetary policy to maintain price stability while allowing exchange rates to adjust.
- Conserve foreign exchange reserves for when financial conditions worsen.
- Use FX interventions or other measures only if financial market disturbances justify them.
Debt distress and the Common Framework
- Too many low‑income countries are close to or already in debt distress.
- Progress toward orderly debt restructuring through the Group of 20’s Common Framework is urgently needed — “time may soon run out.”
- Only three countries have approached the Common Framework; progress has been slow but some recent advances (e.g., Zambia) could help facilitate future processes.
- Eligible countries with sound policies should consider improving liquidity buffers and requesting access to precautionary instruments from the Fund.
- Preemptive macroprudential and capital flow measures recommended where appropriate, in line with the Integrated Policy Framework.
IMF risk management instruments and facilities
- The Fund has opened a food shock window to allow countries to access emergency financing to address elevated food prices.
- Reference to SDR allocation (650 billion) and the upcoming Resilience and Sustainability Trust to support climate‑related and long‑term projects.
Regional and country highlights
- United States: growth slowed to 1 percent in 2023 forecast due to monetary tightening.
- China: 2023 growth forecast at 4.4 percent, pressured by property sector weakness and lockdowns tied to zero COVID policy.
- Euro area: projected growth of 0.5 percent in 2023; many countries in the region experienced stronger‑than‑expected 2022 outcomes but face sharp slowdowns.
- Russia:
- IMF revised 2022 contraction from minus 6 percent to minus 3.4 percent.
- Reasons for milder contraction: energy exports diverted to nonsanctioning countries; large government footprint and employment at pre‑crisis levels; ruble appreciation lowering inflation; large policy support including fiscal stimulus and policy rate decreases.
- But output at end‑2022 is about 9 percent below pre‑war expectations, with gaps widening over the medium term.
- Italy:
- Positive revision for 2022, but a very sharp slowdown expected for 2023, with a technical recession likely driven by energy exposure and tightening monetary policy.
- Advice: focus support on the most vulnerable, preserve fiscal space and ensure debt declines on a medium‑term path.
- Spain:
- Growth projection for 2022 at 4.3 percent and 1.2 percent for 2023; strong tourism and potential boost from European recovery funds.
- Note that second quarter data released after forecast cutoff could raise 2023 numbers.
- Latin America:
- Upgraded forecast for 2022 to 3.5; modest downgrade for 2023 to 1.7.
- Heterogeneous region; some countries benefited from early monetary tightening and commodity price strength in 2022.
- India:
- Growth of 6.8 percent for this year and projection of 6.1 percent for next year.
- Inflation projected at 6.9 percent for this year and coming down to 5.1 percent.
- Expectation that inflation will return to the tolerance band of 4 percent in fiscal year 2023/2024 with additional monetary tightening.
- Egypt:
- Forecast downgraded for 2023 to 4.4 percent.
- Country faced large capital outflows and heightened inflation; rate hikes viewed as appropriate.
- Sub‑Saharan Africa and the Horn of Africa:
- Region severely affected by the war in Ukraine through food, fuel, and fertilizer price spikes.
- COVID remains a severe shock: vaccination rate of 26 percent in sub‑Saharan Africa versus 66 percent in the rest of the world; booster coverage about 2 percent.
- Two‑thirds of countries in the region are facing stress or debt distress.
- IMF tools (SDRs, Resilience and Sustainability Trust, food shock window) and support for the Common Framework are emphasized.
Food and energy shocks, humanitarian concerns
- Food prices spiked in the last year, creating substantial hardship for low‑income households.
- Black Sea grain deal temporarily eased pressures; recent wheat price rises reflect uncertainty about continuation of the deal.
- IMF’s new food shock window provides emergency financing to address elevated food prices.
- Special feature in the World Economic Outlook examines drivers of food inflation.
Climate transition
- WEO contains a chapter on the near‑term macroeconomic cost of the climate transition.
- Main message: near‑term macroeconomic costs of the transition are modest compared with the much larger costs of failing to limit uncontrolled climate change.
- Climate transition is gradual and yields are larger if started early; credible paths toward 2030 objectives recommended.
- Climate policy progress, debt resolution, and targeted global cooperation can help overcome geoeconomic fragmentation.
Transcript of WEO press briefing, October 11, 2022 — IMF Communications Department, WEO Press Briefing Annual Meetings 2022