The International Monetary Fund identified in its forecasts published on Tuesday seven “particularly worrying” risk factors, the materialization of which might lead to a “worst-case scenario”: one of the most serious economic crises for five decades.
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War in Ukraine and energy prices
According to the IMF, there is “a lot of uncertainty” around the levels of Russian gas delivery to Europe for 2022 and 2023. A 40% drop compared to last year has already been observed since April.
The report also envisages a complete cessation of Russian gas exports, which would force European countries to implement energy rationing, affecting major industrial sectors.
Such a scenario would “significantly” reduce growth in the euro area in 2022 and 2023, with a “cross-border” echo.
Inflation persistence
While inflation is “broadly expected” to return to pre-pandemic levels by the end of 2024, further supply disruptions might cause inflation to become entrenched, the IMF says.
Sufficiently large shocks would risk creating a situation of “stagflation”, where the recession would be accompanied by high inflation.
Disinflation policies
The IMF is concerned that central banks, in their attempts to counter inflation, are having too heavy a hand.
By not choosing the right gauge for key rates, central banks would expose their economies to an excessive drop in demand.
“The risk of recession is particularly significant in 2023”, analyzes the report.
Emerging economies debt
With interest rates rising in advanced economies, borrowing costs will be higher across the world, and there is a risk that national currencies will depreciate significantly once morest the dollar.
Such a risk would also occur at a time when the financial position of many States is already “strained”, according to the IMF.
The institution estimates that 60% of the countries among those with low incomes are at risk of finding themselves, or are already, in difficulty with their debt. Ten years ago, the figure was around 20%.
Getting bogged down in China
The first half of 2022 was marked by numerous anti-Covid restrictive measures in China which seriously disrupted the country’s manufacturing activity, in particular, and by extension, global activity.
A new epidemic outbreak, accompanied by the Chinese government’s zero-Covid policy, might cause the economic slowdown in China to stall, leading to “significant repercussions on a global scale”, according to the IMF, which also mentions a risk linked to the crisis in the Chinese real estate sector.
Civil unrest and famine
Since expenditure on food and energy represents essential expenditure for households and cannot be replaced, the current inflation situation “represents a threat not only for economic stability, but also for social stability”, underlines the IMF.
“The link between price and social stability means that additional barriers to trade, or a poor harvest due to extreme heat and fertilizer shortages, are likely to cause more suffering, famine, or civil unrest,” the document details. .
Fragmentation of the global economy
With the war in Ukraine, the IMF warns of a “serious risk for the medium-term outlook”: a fragmentation of the world economy into geopolitical blocs with glaring differences in technological standards, international payment systems, and reserves currencies.
“Fragmentation might also diminish the effectiveness of multilateral cooperation in responding to climate change, with an added risk that the current food crisis might become the norm,” concludes the IMF.
