The IMF warns of the risk of a global recession and lowers the GDP forecast by 0.8 for Spain
The report 'Update on global economic prospects: gloomy and more uncertain' published by the International Monetary Fund (IMF) has cut the growth forecasts provided in its latest study in April due to the consequences of the invasion of Ukraine and the inflationary spiral . In the case of Spain, the institution anticipates a GDP growth of 4% for 2022 and 2% for 2023, which represents a reduction of 0.8 and 1.3% respectively.
With this announcement, the IMF joins the rest of economic organizations and institutions that had already revised downwards the growth of our economy, as is the case of the Bank of Spain, the OECD, the Airef or the European Commission, among others. Regarding the Government's latest forecasts, announced this morning by the First Vice President and Minister of Economy, Nadia Calviño, the Executive has established its growth forecasts at 4.3% for 2022 and 2.7% for 2023 in Aprilbut the IMF figures show a less friendly scenario.
This lowering of growth expectations poses "a particularly prominent recession risk for 2023" according to the report, when growth in a sizeable number of economies is expected to "bottom out." Maintaining financial stability is one of the main challenges in the face of the new path of monetary policy, which will require reforms in the debt resolution frameworks, in the words of the IMF.
IMF growth forecasts
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IMF growth
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prior to the month of April)
Given the constant increase in prices and its consequences on living standards throughout the planet, the institution points to the control of inflation as the main priority, with monetary policies that will entail costs for the economy in the short term, but will avoid greater evils in the long run. Taking into account the limitation of government budgets after two years of the pandemic, the IMF sees only two possible paths: either increase taxes or cut public spending.
Likewise, it warns that if Russia decides to completely cut off gas supplies to Europe, for which the European Union is preparing by asking its members for a 15% reduction in consumption, would significantly increase inflation throughout the world through the increase in energy prices. In addition, this scenario could force Europe to force gas rationing, which would affect important industrial sectors, reducing growth in the euro zone to a greater extent during 2022 and 2023.
But the consequences of the war in Ukraine do not stop there. The IMF warns that the implications of food shortages and the interruption of the supply chain could materialize in conflicts and unrest throughout the world, as has already been seen in Sri Lanka with the overthrow of the government by its citizens. The worst scenario points to economic fragmentation and positioning in blocs, similar to what happened during the Cold War.
The risk of not tackling inflation
The institution revises upwards the inflation forecast in the most developed economies due to the higher-than-expected increase in the cost of food and energy. However, the IMF also considers the risk that the increase in prices will continue due to interruptions in the supply chain and the increase in energy prices as a result of the invasion of Ukraine. The severity of these shocks could lead to a stagflation phenomenon, that is, the increase in inflation keeps pace with high unemployment rates; although it is not the only scenario that is considered.
In the case of the eurozone, the IMF increases the inflation forecast for this year by 2.9%, standing at 7.3%, and reduces growth expectations by 0.2% for 2021 and 1.1 % for 2023. In the case of countries such as Spain, France or Germany, the institution points to the effects of the war in Ukraine as the main obstacle, together with the restriction of financing conditions as a result of the rise in interest rates and the paralysis of the purchase of assets by the European Central Bank.
Despite this, the upward pace of inflation is expected to subside as of 2023 and return to pre-pandemic levels in 2024 as a result of the tightening of monetary policy and the normalization of energy costs, despite the risks involving the war in Ukraine.
Factors and priorities
The contraction in the economy after the drop in growth expectations responds to multiple factors according to the IMF, among which the war in Ukraine, inflation in Europe and the United States and the complications in China stand out. The situation of the Asian giant is also one of the main burdens for the global economy, since the outbreaks of coronavirus and their respective confinements are joined by the deep crisis it is suffering in its real estate sector and the consequences of the closure of the port of Shanghai in April of 2022, one of the main nerve centers for world trade.
In reference to the measures to avoid a worse scenario, the IMF recommends following a series of guidelines to reduce the impact of economic turmoil. In the first place, the institution advocates carrying out specific policies to control energy and food prices that protect the most vulnerable without causing a distortion in prices. In addition, the agency points out that those policies "that seek to directly limit prices and wages in the private sector should generally be avoided, since they have proven costly and inefficient in the past."
Although the impact of the coronavirus is diminishing in much of the world, the IMF asks to limit the limitations of living with the pandemic, making the vaccines more accessible so that the 130 countries that have not yet met the goal of vaccinating 70% of its population achieve it and new variants can be curbed.
Finally, the institution highlights the need to address climate change with urgent multilateral agreements, as well as to increase investment in the transition to green energies to limit dependence on Russian gas and guarantee security.
