After the pandemic, we knew that nothing would ever be the same. What we did not expect is that, aside from more working-from-home flexibility, just about everything got worse. The International Monetary Fund recently stated that the global economy is going to perform worse than expected in the next year. Much of that performance will have to do with heightened interest rates, which central banks around the world have raised to fight soaring inflation.
The Blunt Object
The IMF’s prediction came about as part of their World Economic Outlook report, the organisation’s annual report about the state of the global economy. With Russia’s war in Ukraine and pandemic-caused supply chain disruptions that still have yet to resolve themselves, energy and food prices are soaring everywhere, as we have noted in our The Inflation Situation series. Lofty interest rates force central banks to use the main tool at their disposal: increased interest rates. But increased rates cool off economies, so if rates are raised too high, so too is the cooling process. And because interest rates are a blunt force instrument, it is hard to determine whether any rate increase is a correct one. If businesses invest less and consumers spend less, there will be recessions in wealthier nations and sovereign debt crises in poorer ones.
For the IMF, the result will be clear: “In short, the worst is yet to come, and for many people, 2023 will feel like a recession”. While the economy is set to grow 3.2% this year, that growth is expected to slow to 2.7%. These figures are far below what the IMF had predicted earlier this year, and they blame interest rate hikes for slower growth. According to the IMF’s chief economist, “We’re expecting about a third of the global economy to be in a technical recession”, and they define a “technical recession” as an economy that contracts for two consecutive quarters. Unfortunately, many experts are expecting even worse results. Bloomberg surveyed a large number of economists, and then averaged their responses. They expect 2.9% global growth in 2022, followed by 2.5% next year. The United States, China, and the eurozone are all slowing, and those slowdowns will have cascading effects throughout the world.
Lately, the United States has had things relatively good, since lower gasoline prices have meant inflationary relief throughout the country. But with OPEC’s “October surprise” decision to curb production, that relief does not seem like it will last. Europe has been reliant on Russia for energy, which has been fraught with tension, to say the least. While tourism has been keeping many European economies afloat, manufacturing has slowed considerably. And China’s ZERO COVID policy has been one of the worst economic policies of all time. No matter where the IMF looks, things are looking grim.