[Summary] IMF Warning: "Global Recession Could Be on the Brink"

[Asia Economy New York=Special Correspondent Joselgina] The International Monetary Fund (IMF) has downgraded its global economic growth forecast in just three months, warning that the world could soon face a recession crisis. In particular, the IMF lowered the U.S. forecast by a significant 1.4 percentage points, diagnosing that avoiding a recession will be difficult.

Pierre-Olivier Gourinchas, IMF Chief Economist, stated in a separate article following the release of the World Economic Outlook update on the 26th (local time), "The world could soon be on the edge of a global recession," adding, "It has been only two years since the last recession."

◇Why Did the IMF Lower Growth Forecasts in Just Three Months and Warn of a Recession?

According to the IMF's revised forecast, global economic growth is expected to slow from 6.1% last year to 3.2% this year and 2.9% next year. The growth rates for this year and next were lowered by 0.4 percentage points and 0.7 percentage points respectively compared to the April forecast, indicating a sharp slowdown in economic momentum.

Chief Economist Gourinchas cited the slowdown in the growth of the world's three largest economies?the United States, China, and the Eurozone (19 countries using the euro)?as the reason for the revision. This reflects the impact of soaring inflation and consequent global tightening, China's economic slowdown due to COVID-19 lockdowns, and ripple effects from the Ukraine crisis.

By country, the U.S. showed a notable downward revision (-1.4 percentage points). The U.S. growth forecast dropped from 3.7% in April to 2.3%. China’s forecast was also lowered by 1.1 percentage points to 3.3%, which the IMF described as the lowest level in over 40 years. Additionally, growth forecasts for major European countries, such as Germany, fell from 2.1% to 1.2%. South Korea’s growth forecast was lowered by 0.2 percentage points to 2.3%.

The IMF assessed that the probability of a recession starting in the Group of Seven (G7) countries is about 15%, four times higher than usual. Gourinchas said, "As household savings accumulated during the pandemic are depleted next year, some countries are likely to pass through economic troughs and experience recessions." Regarding the U.S., he pointed out, "The current environment suggests that the U.S. is very unlikely to avoid a recession," noting that by the definition of two consecutive quarters of negative growth, a recession may have already begun.

This contrasts with the U.S. administration, including President Joe Biden, which argues that strong employment data means two consecutive quarters of negative growth cannot be definitively classified as a recession. In the U.S., which is rapidly tightening monetary policy, recent economic indicators such as consumer sentiment also show signs of slowing. Gourinchas emphasized, "The 2.3% growth forecast for the U.S. this year does not assume a recession as the baseline," but added, "The path to avoiding a recession is narrow."

The U.S. Bureau of Economic Analysis will release second-quarter GDP data on the 28th. The Atlanta Federal Reserve Bank’s GDPNow, which compiles real-time estimates, projected 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 to 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 recession warning in the New York bond market, continues.

◇"Price Stability Is the Top Priority, Tightening Must Continue"…Fed to Decide Interest Rates Tomorrow

The IMF’s warning that "the whole world could soon be on the edge of a recession" suggests that the downside risks previously feared are materializing faster than expected. However, despite recession concerns, the IMF urged policymakers to prioritize curbing soaring inflation through "bold tightening."

It also emphasized that central banks in countries that have recently begun or announced tightening must maintain this course until inflation is controlled. Given that current inflation levels threaten macroeconomic stability, although monetary tightening will negatively impact short-term growth, delaying tightening would worsen economic conditions.

The IMF forecast global inflation to rise by 8.3% this year but expects it to ease somewhat to 5.7% next year. Chief Economist Gourinchas reiterated, "Bringing inflation back to central bank targets is the top priority," warning, "Delaying tightening will only exacerbate difficulties."

The U.S. Federal Reserve (Fed) has entered a two-day Federal Open Market Committee (FOMC) meeting starting today to decide interest rates. According to a CNBC survey released today, 63% of respondents believe 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 prices in over a 75% chance of a 0.75 percentage point rate hike this month. This would set the U.S. benchmark interest rate in the 2.25?2.50% range. 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.