IMF and World Bank warn of recession next year

(FASTNEWS | COLOMBO) – The leaders of the IMF and World Bank have said much of the world will slide into recession next year, and that lost output between now and 2026 will amount to some four trillion dollars – equivalent to the entire German economy.

Much of the impact of this economic downturn will be borne by the Developing World. World Bank President Daivid Malpass said development had already gone into reverse, with an extra 70 million people now living in poverty, and a 4% reduction in median income.

He said the three big economic players in the World – the EU, The USA and China – were able to use their economic power to suck in funds from elsewhere, to cushion themselves against the downturn. But this made it more expensive for the developing world, worsening the crisis they face.

Mr Malpass said the three big central banks bond buying programmes – which have enabled their governments to fund fiscal deficits cheaply – have privileged bonds issued by their governments to the detriment of other nations, particularly in the developing world.

In opening remarks at the start of a week of high level meetings hosted by the IMF and World Bank in Washington, Kristalina Georgieva, the IMF managing director, said the world is undergoing a shift from a rules based, low inflation low interest rates environment, to one that is much more volatile, with high inflation and high interest rates.

She said the main drivers of this shift were the impact of Covid on supply chains, and a “senseless war” that is causing a surge in prices, especially energy and food prices. Ms Georgieva said this disruption in how economies function has caused prices to remain “stubbornly high”, causing Central Banks to tighten financial conditions “faster than anticipated”.

The consequences were a slowdown in all the key economies – “in the Euro area primarily because of gas prices, in China because of Covid and volatility in the housing sector – we see a very significant problem in China dragging down growth – and in the US a still very strong labour market but losing momentum because inflation is starting to bite. So, we ask this week – what can be done?”.

She said there are three main areas of focus, the first of which is constraining inflation. “We cannot afford inflation to become a runaway train”, she said, describing inflation as a “dramatic tax, especially on the poor”. But she acknowledged it is a difficult road to follow and will cause pain.

In particular, the fast rise in interest rated by the Federal Reserve has led to an inflow of funds into dollars, strengthening the US currency against almost all others, making life very painful for developing countries.

Mitigating that pain is the second focus – Governments are right to try to shelter people and industries from pain, but she warned this must be very well targeted: otherwise, it adds fuel to the fire.

And it results in Central Banks and governments taking opposite actions with Central banks applying the “monetary brake”, while government “step on the fiscal gas pedal” – which she said never results in a smooth journey.

The third area for concern is managing a “big scary debt problem” in the world, and getting in under control.

“It’s not a rosy picture, but if we join forces and work together we can reduce the pain that is ahead of us in 2023,” said Ms Georgieva.