With soaring prices and growing financial uncertainty across the world, a recent report by International Monetary Fund (IMF) provides a grim outlook — even for the world’s most advanced economies.
While the world’s largest economies—the U.S., China, and the Euro area -- faced a downgrade, Canada’s economy has also been projected to drive growth down from 3.4 per cent this year to 1.8 per cent next year but remains the fastest GDP growth in amongst all the G7 nations in both the years.
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IMF highlighted tighter financial conditions, China’s economic slowdown, COVID-19 outbreaks, and the negative impact of the war in Ukraine as major shocks that have weighed down the world economy. The Washington-based institute said higher-than-expected inflation across the world—especially across advanced economies— has further weakened its growth projections, increasing the probability of recession for G7 economies.
In its previous reports, IMF had highlighted the gloomy developments of 2022 but only in its most recent report did it say that the downside risks have begun to materialize.
With economic uncertainty and growing concerns around inflation, IMF experts now warn that the possibility of recession has also increased.
The probability of a recession hitting G7 economies is estimated to be nearly 15 per cent—four times higher its usual level.
“Should additional shocks hit the global economy, economic outcomes would be even worse,” the report said.
The IMF lowered the global growth from last year’s 6.1 per cent to 3.2 per cent this year, which falls further to 2.9 per cent in 2023.
HIGHER-THAN-EXPECTED INFLATION
Global inflation remains a major concern for the IMF— partly due to the rising food and energy prices.
IMF’s recent report said that inflation can reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies—upward revisions of 0.9 and 0.8 percentage points, respectively, from July.
“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,” Pierre-Olivier Gourinchas, the IMF's director of research, wrote in a blog post on Tuesday.
Canada’s inflation lags behind countries such as the U.S., and the U.K.— which are also experiencing astronomical rates of increase over the past year.
While every G7 country is facing a rising inflation, the U.K.’s inflation shot up to 9.4 per cent in June – its highest since the early 1980s. Meanwhile, the U.S. reached its highest level in more than 40 years, at 9.1 per cent. Canada's inflation also reached a peak at 8.1 per cent, the highest since 1991.
Among its G7 peers, Canada has the third highest inflation rate, followed by Italy, Germany, France, and Japan.
IMF said that even with the global food prices stabilizing, food inflation remains much higher than in 2021. With prices of cereal going up, the primary driving force has been the ongoing war in Ukraine, with a compounding impact from the export restrictions in several countries. Low-income countries, especially sub-Saharan Africa, are facing a deeper impact of food inflation.
Recent data from the Organisation for Economic Co-operation and Development (OECD) shows that Canada had the fourth-highest food inflation among its G7 peers in the month of June.
DISINFLATION — MORE COSTLY THAN ANTICIPATED
With increasing prices squeezing living standards worldwide, taming inflation should be the first priority for policymakers, according to IMF experts. They said any delay in addressing inflation could only exacerbate the situation.
The central banks across all G7 nations have been rushing to tighten their monetary policies, as many drift away from their inflation targets.
Just this month, the Bank of Canada raised its key interest rate target by 100 basis points —its biggest hike since 1998.
In a recent press conference in Ottawa, Bank of Canada Governor, Tiff Macklem said “restoring price stability—low, stable and predictable inflation—is paramount.”
He said the drivers of inflation are the same in Canada as in most countries.
While the central banks have responded to high inflation by increasing interest rates, the exact amount of policy tightening required to lower inflation without inducing a recession is difficult to ascertain, the IMF said.
