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Global economy: Recession will hit a third of the world in 2023, warns IMF chief

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Virendra Pandit

 

New Delhi: Warning that the global economy would face a tougher year in 2023 than the previous year, International Monetary Fund (IMF) Managing Director Kristalina Georgieva has said a third of the world would be hit hard.

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 economic activity, she said.

In October 2022, 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, the media reported.

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 because of mass protests against it, President Xi Jinping on Saturday called in a New Year’s televised 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 in a TV interview.

Moreover, a “bushfire” of expected Covid-19 infections there in the months ahead is likely to further hit its economy this year and drag on both regional and global growth, said Georgieva, who visited China on IMF business in December.

“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 traveling.”

“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 its October forecast, the IMF pegged Chinese GDP growth in 2022 at 3.2 percent, 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 percent, while global activity slowed further.

Her comments, however, suggest another cut to both China and global growth outlooks may be in the offing later this month when the IMF 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 might 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 labor market remaining quite strong.”

But it may also hamper the progress the US Fed needs to make in bringing inflation back to its targeted level from the highest levels in four decades touched in 2022. 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 percent target.

“This is … a mixed blessing because if the labor market is very strong, the Fed may have to keep interest rates tighter for longer to bring inflation down,” Georgieva said.

Last year, in the most aggressive policy tightening since the early 1980s, the US Fed lifted its benchmark policy rate from near zero in March to the current range of 4.25 percent to 4.50 percent. In December, the Fed projected it will breach the 5 percent mark in 2023, a level not seen since 2007.

Indeed, the US job market will be a central focus for Fed officials who would like to see demand for labor slacken to help undercut price pressures.

The first week of 2023 will bring a raft of key data on the employment front, including Friday’s monthly nonfarm payrolls report, which is expected to show the US economy minted another 200,000 jobs in December 2022, and the unemployment rate remained at 3.7 percent—near the lowest since the 1960s.