IMF Cuts Global Growth Outlook, Warns High Inflation Threatens Recession

Customers dine at a restaurant in a shopping area in Beijing, China July 25, 2022. (Reuters)
Customers dine at a restaurant in a shopping area in Beijing, China July 25, 2022. (Reuters)
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IMF Cuts Global Growth Outlook, Warns High Inflation Threatens Recession

Customers dine at a restaurant in a shopping area in Beijing, China July 25, 2022. (Reuters)
Customers dine at a restaurant in a shopping area in Beijing, China July 25, 2022. (Reuters)

The International Monetary Fund cut global growth forecasts again on Tuesday, warning that downside risks from high inflation and the Ukraine war were materializing and could push the world economy to the brink of recession if left unchecked.

Global real GDP growth will slow to 3.2% in 2022 from a forecast of 3.6% issued in April, the IMF said in an update of its World Economic Outlook. It added that world GDP actually contracted in the second quarter due to downturns in China and Russia.

The fund cut its 2023 growth forecast to 2.9% from the April estimate of 3.6%, citing the impact of tighter monetary policy.

World growth had rebounded in 2021 to 6.1% after the COVID-19 pandemic crushed global output in 2020 with a 3.1% contraction.

"The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one," IMF Chief Economist Pierre-Olivier Gourinchas told a news conference.

"The world's three largest economies, the United States, China and the euro area, are stalling, with important consequences for the global outlook," he added.

‘Plausible’ Russian gas embargo

The fund said its latest forecasts were "extraordinarily uncertain" and subject to downside risks from Russia's war in Ukraine pushing energy and food prices higher. This would exacerbate inflation and embed longer-term inflationary expectations that would prompt further monetary policy tightening.

Under a "plausible" alternative scenario that includes a complete cut-off of Russian gas supplies to Europe by year-end and a further 30% drop in Russian oil exports, the IMF said global growth would slow to 2.6% in 2022 and 2% in 2023, with growth virtually zero in Europe and the United States next year.

Global growth has fallen below 2% only five times since 1970, Gourinchas said - recessions in 1973, 1981 and 1982, 2009 and the 2020 COVID-19 pandemic.

The IMF said it now expects the 2022 inflation rate in advanced economies to reach 6.6%, up from 5.7% in the April forecasts, adding that it would remain elevated for longer than previously anticipated. Inflation in emerging markets and developing countries is now expected to reach 9.5% in 2022, up from 8.7% in April.

"Inflation at current levels represents a clear risk for current and future macroeconomic stability and bringing it back to central bank targets should be the top priority for policymakers," Gourinchas said.

An unprecedented synchronized global monetary policy tightening by central banks will "bite" next year, slowing growth and pressuring emerging market countries, but delaying this process "will only exacerbate the hardship," he said, adding that central banks "should stay the course until inflation is tamed."

US, China downgrades

For the United States, the IMF confirmed its July 12 forecasts of 2.3% growth in 2022 and an anemic 1.0% for 2023, which it previously cut twice since April on slowing demand.

The Fund deeply cut China's 2022 GDP growth forecast to 3.3% from 4.4% in April, citing COVID-19 outbreaks and widespread lockdowns in major cities that have curtailed production and worsened global supply chain disruptions.

The IMF also said the worsening crisis in China's property sector was dragging down sales and investment in real estate. It said additional fiscal support from Beijing could improve the growth outlook, but a sustained slowdown in China driven by larger-scale virus outbreaks and lockdowns would have strong spillovers.

The IMF cut its eurozone growth outlook for 2022 to 2.6% from 2.8% in April, reflecting inflationary spillovers from the war in Ukraine. But forecasts were cut more deeply for some countries with more exposure to the war, including Germany, which saw its 2022 growth outlook cut to 1.2% from 2.1% in April.

Italy, meanwhile saw an upgrade in its 2022 growth outlook due to improved prospects for tourism and industrial activity. But the IMF said last week that Italy could suffer a deep recession under a Russian gas embargo.

Russia's economy is expected to contract by 6.0% in 2022 due to tightening Western financial and energy sanctions - a "fairly severe recession," Gourinchas said. But that is an improvement over the April forecast of an 8.5% contraction, due to Moscow's measures to stabilize its financial sector, which is helping to support the domestic economy.

The IMF estimates that Ukraine's economy will shrink by some 45% due to the war, but the estimate comes with extreme uncertainty.



Egypt Raises Domestic Fuel Prices by up to 15% before IMF Review

This picture taken on March 20, 2024 shows a view of the Cairo University bridge across the Nile river connecting Cairo (R) with its twin city of Giza (L). (AFP)
This picture taken on March 20, 2024 shows a view of the Cairo University bridge across the Nile river connecting Cairo (R) with its twin city of Giza (L). (AFP)
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Egypt Raises Domestic Fuel Prices by up to 15% before IMF Review

This picture taken on March 20, 2024 shows a view of the Cairo University bridge across the Nile river connecting Cairo (R) with its twin city of Giza (L). (AFP)
This picture taken on March 20, 2024 shows a view of the Cairo University bridge across the Nile river connecting Cairo (R) with its twin city of Giza (L). (AFP)

Egypt raised the prices of a wide range of fuel products on Thursday, the official gazette said, four days before the International Monetary Fund (IMF) conducts a third review of its expanded $8 billion loan program for the country.

The official gazette, citing the petroleum ministry, said petrol prices increased by up to 15% per litre, with 80 octane rising to 12.25 Egyptian pounds ($0.25), 92 octane to 13.75 pounds and 95 octane to 15 pounds.

Diesel, one of the most commonly used fuels, saw the biggest increase, rising to 11.50 Egyptian pounds ($0.24) from 10 pounds, according to Reuters.

This is the second time the government has raised fuel prices since the IMF expanded its loan program by $5 billion in March. Egypt has committed to slashing fuel subsidies as part of the agreement.

But Egyptians who spoke to Reuters, including taxi driver Sayed Abdo, complained that Thursday's move would mean an automatic increase in prices for daily goods.

"If you ride with me today and usually pay 10 Egyptian pounds, I will ask you for 15, because fuel prices are raised. That's normal, because when I go get food, what I used to buy with 10 Egyptian pounds becomes now for 15," he said.

"We don't know where we're headed with these prices."

On Wednesday, Prime Minister Mostafa Madbouly said prices of petroleum products will gradually increase until the end of 2025, adding that the government could no longer bear the burden of increasing consumption.

Egyptians have also endured blackouts, which Madbouly said had ended at the start of this week, as the country struggled to import sufficient natural gas to tackle the summer heat.

In April, the IMF estimated that Egypt will spend 331 billion Egyptian pounds ($6.85 billion) on fuel subsidies in 2024/25 and 245 billion in 2025/26.

The IMF's approval for the third review of the expanded loan program was originally expected on July 10, but was pushed back to July 29, with the lender attributing the delay to the finalisation of some policy details.

The IMF is expected to disburse $820 million to Egypt after concluding its review.