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As central banks across the world simultaneously hike interest rates in response to inflation, the governing body that monitors global economic stability warns “the world may be edging toward a global recession in 2023”.
Managing director Kristalina Georgieva estimates a US$4 trillion ($6.2 trillion) global output loss in output through 2026, citing the current trajectory as a “massive setback”.
Speaking at an International Monetary Fund (IMF) event on Thursday (Friday AEDT) in Washington, Ms Georgieva said she expects the situation “to get worse [rather] than to get better”.
Painting a fairly grim picture, she cited uncertainty that remains “extremely high” after Russia’s invasion of Ukraine and the pandemic, and that the global economy is “experiencing a fundamental shift in the global economy”.
“From a world of relative predictability — with a rules-based framework for international economic cooperation, low interest rates, and low inflation — to a world with more fragility, greater uncertainty, higher economic volatility, geopolitical confrontations, and more frequent and devastating natural disasters.”
The IMF has downgraded its current growth projection already three times to just 3.2 per cent in 2022 and 2.9 per cent for 2023, with the latter estimate expected to be lowered again this week.
It estimates countries accounting for about one-third of the global economy will experience at least two consecutive quarters of contraction this or next year, Ms Georgieva said.
“Even when growth is positive, it will feel like a recession because of shrinking real incomes and rising prices,” she said.
As growth across the global economies is slowing, Australia’s Real GDP is also expected to take a hit from 3.8 per cent in 2022 to 1.9 per cent GDP in 2023, according to the world bank.
The federal treasurer, Jim Chalmers, told the ABC, ahead of the meeting with G20 finance ministers, “the world is bracing for another global downturn” but was “optimistic” on Australia’s outlook.
“I am optimistic about our country, I am optimistic about our economy, but first we're going to have to navigate what are increasingly difficult, global conditions.”
“We go into that with a lot going for us, but we will not be spared another global downturn,” Mr Chalmers said.
Based on the latest global forecasts, the federal treasurer said the budget to be handed down from 25 October will need to be revised down “quite substantially”.
“It's increasingly becoming the expectation of the global economic community that we could be facing what would be the third, substantial global economic downturn in the past decade and a half,” he said.
The first being the financial crisis, the second the health crisis, and now the inflation crisis, which risks a “hard landing” when central banks act as hard as they have been.
“We've got that trillion dollars in debt, we need to rebuild buffers where we can, we need to trim spending that's wasteful which is a big priority for the Budget that I'll be handing down in two weeks' time.
“The global economy is going to deteriorate further, perhaps even sharply, then we need to make sure that the spending in the Budget is targeted to those conditions.”
Calls to bring down inflation
Given the darkening outlook, IMF’s Ms Georgieva called on policymakers to “stay the course” to bring down inflation as a means of stabilising economies.
“Not tightening enough would cause inflation to become de-anchored and entrenched, which would require future interest rates to be much higher and more sustained, causing massive harm on growth and massive harm on people,” she said.
“On the other hand, tightening monetary policy too much and too fast — and doing so in a synchronised manner across countries — could push many economies into prolonged recession.”
She added, thus far higher interest rates were taking “some of the heat” out of domestic demand, including in the housing markets.
Indeed, finding the balance in bringing inflation down without overheating the economy, with high interest rates, is a move the Reserve Bank of Australia (RBA) is determined to ensure.
As Australia’s inflation tips 6.8 per cent, which is below global inflation around 7.6 per cent, the RBA has been racing to lift the cash rate out of its historic low levels — now at 2.6 per cent.
October’s 25-bp bump, which preceded four 50-bp hikes, provided some indication that the central bank was returning to a more ‘business as usual’ approach, and that the interest rate increase were having an impact on household spending.
“The size and timing of future interest rate increases will continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” Mr Lowe said.
The RBA’s latest Financial Stability Review is more sombre than six months ago and consistent with it’s decision to slow the pace of rate hikes.
The latest report highlighted Australian households, firms and banks are generally in a “strong financial position” but some households are already feeling the strain and a small number with high debt and low savings are particularly vulnerable.
The analysis showed about 20 per cent of borrowers will see their minimum payment go above 30 per cent of their incomes, following the 2.5 per cent increase to the cash rate this year.
“Many households will be able to manage this by reducing their spending and/or their rate of saving”, the RBA said.
“However, a small share of borrowers with lower savings and high debt are vulnerable to payment difficulties.”
[Related: Loan arrears rates likely to increase RBA]
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