[IMF's Warning] "The Problem is Inflation" Urges 'Bold Tightening' Despite Recession Concerns

[Asia Economy New York=Special Correspondent Joselgina] The International Monetary Fund (IMF)'s warning that "the entire world may soon stand on the brink of a recession" suggests that the downward risks previously feared are materializing faster than expected. The ongoing Russian invasion of Ukraine, the resulting energy and food crises, high inflation in major countries, and global monetary tightening are representative examples.

However, despite these recession concerns, the IMF urged policymakers worldwide to make curbing soaring inflation their top priority by implementing "bold tightening." Although monetary tightening may negatively impact short-term growth, delaying such measures could worsen the economic situation.

◇Why is the IMF warning of a recession?

According to the revised World Economic Outlook report released by the IMF on the 26th (local time), the economic growth forecasts for the two major economies (G2), the United States and China, were lowered by 1.4 percentage points and 1.1 percentage points respectively in just three months. The U.S. forecast was reduced from 3.7% in April to 2.3% due to decreased household purchasing power and tightening monetary policies. China’s forecast was also lowered to 3.3%, reflecting the impact of additional COVID-19 lockdowns and the real estate crisis. The situation is also unfavorable in Europe (EU), where recession risks have increased since the Ukraine crisis. Germany’s growth forecast dropped by 0.9 percentage points from 2.1% to 1.2%, and the UK’s forecast was also revised downward by 0.5 percentage points.

The reason the IMF lowered the global growth outlook in just three months is primarily due to the slowdown in the world’s three largest economies: the U.S., China, and the Eurozone. Pierre-Olivier Gourinchas, IMF Chief Economist, said, "The stagnation of the world’s three largest economies is significantly impacting the global outlook," adding, "Higher-than-expected inflation triggered global tightening, China’s recession was worse than anticipated, and there were additional negative spillover effects from the Ukraine war."

In particular, the U.S., which is rapidly stepping on the tightening pedal, is showing signs of economic slowdown in recent consumer sentiment and other economic indicators. Gourinchas noted, "The 2.3% growth forecast for the U.S. this year does not assume a recession as the baseline," but cautioned, "The path to avoiding a recession is narrow." Some have pointed out that, by the conventional definition of a technical recession as two consecutive quarters of negative growth, the U.S. recession may have already begun.

This contrasts with the stance of the Biden administration, including President Joe Biden, which argues that even if two consecutive quarters of negative growth materialize, it cannot be defined as a recession based on the strong labor market. The U.S. Bureau of Economic Analysis will release the second-quarter Gross Domestic Product (GDP) on the 28th. The Atlanta Federal Reserve Bank’s GDPNow, which compiles real-time data, estimated on the 19th that the U.S. second-quarter GDP growth rate will be -1.6% annualized.

Roberto Perli, Global Policy Research Director at investment bank Piper Sandler, said, "There is clearly a path toward a soft landing, but it is narrow and very difficult to find," adding, "Some indicators already suggest that a recession has arrived or is near." The inversion of short- and long-term Treasury yields, regarded as a precursor to recession in the New York bond market, continues.

◇"Price stability is the top priority... tightening must continue"

Nonetheless, the IMF emphasized that despite repeated recession warnings, central banks that have recently tightened or announced tightening must maintain this course until inflation is under control. Considering that the current inflation level threatens macroeconomic stability, hesitation in tightening could cause even greater pain.

The IMF projected that global inflation will rise by 8.3% this year but expects it to moderate to 5.7% next year. Gourinchas stressed again, "Bringing inflation back to central bank targets is the top priority," and "Delaying tightening will only worsen difficulties."

Immediately, the U.S. Federal Reserve (Fed) has entered a two-day Federal Open Market Committee (FOMC) meeting starting today to decide on interest rates. According to a survey released by CNBC on the same day, 63% of respondents answered "yes" to the question, "Do you think the Fed’s efforts to lower inflation will cause a recession?" Despite these concerns, the Fed is expected to implement a "giant step" (0.75 percentage point rate hike) for the second consecutive month at this FOMC.

According to the Chicago Mercantile Exchange (CME) FedWatch tool, the federal funds (FF) futures market currently reflects more than a 75% chance of a 0.75 percentage point increase this month. This would bring the U.S. benchmark interest rate to a range of 2.25% to 2.50%. There is also nearly a 25% chance that the Fed will take the strong measure of a 1.0 percentage point hike.

TD Securities forecasted, "Even if the second-quarter GDP released this week signals entry into a recession, the Fed will maintain a hawkish stance to control inflation."

This content was produced with the assistance of AI translation services.