‘Uncertainty is high’: IMF warns risk of recession has grown for wealthy countries

The world is lurching towards a nasty recession, with the risks skyrocketing for richer nations – including Australia.

The world is hurtling towards a recession, with the risks skyrocketing for richer nations – including Australia.

That’s according to the International Monetary Fund (IMF), which issued to the dire warning in its World Economic Outlook update for April.

It explained that the dangers of a downturn had soared for advanced economies as a result of recent US and European bank failures, and dropped its forecast for global output growth by 0.1 per cent.

Australia’s growth is tipped to be 1.6 per cent this year and 1.7 per cent in 2024.

It cautioned that the world economy was “entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner”.

It added the chances of a “hard landing” had “risen sharply”, with IMF chief economist Pierre-Olivier Gourinchas declaring that “the situation remains fragile” and that “downside risks predominate”.

“With the recent increase in financial market volatility and multiple indicators pointing in different directions, the fog around the world economic outlook has thickened,” the IMF report states.

There’s more grim news for Aussies. Picture: NCA NewsWire/Andrew Henshaw

“Uncertainty is high, and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled.

“The major forces that affected the world in 2022 – central banks’ tight monetary stances to allay inflation, limited fiscal buffers to absorb shocks amid historically high debt levels, commodity price spikes and geoeconomic fragmentation with Russia’s war in Ukraine, and China’s economic reopening – seem likely to continue into 2023.

“But these forces are now overlaid by and interacting with new financial stability concerns.”

As a result, a “hard landing – particularly for advanced economies – has become a much larger risk”.

“Policymakers may face difficult trade-offs to bring sticky inflation down and maintain growth while also preserving financial stability,” it said.

Mr Gourinchas said advanced economies were expected to see an “especially pronounced growth slowdown” from 2.7 per cent in 2022 to just 1.3 per cent this year.

“The world economy is still recovering from the unprecedented upheavals of the last three years, and the recent banking turmoil has increased uncertainties,” Mr Gourinchas said.

“Global headline inflation is set to fall from 8.7 per cent in 2022 to 7 per cent in 2023 on the back of lower commodity prices but underlying core inflation is proving to be stickier.

The IMF has downgraded its global growth forecast. Picture: iStock

“Once again, risks are heavily tilted to the downside, they have risen with the recent financial turmoil. Most prominently, recent banking system turbulence could result in a sharper and more persistent tightening of global financial conditions.”

He added that “simultaneous rate hikes across countries could have more contractionary effects than expected, especially as debt levels are at historical highs”.

“There might be a need for more monetary tightening if inflation remains stickier than expected,” he continued.

“These risks and more could all materialise at a time when policymakers face much more limited policy space to offset negative shocks, especially in low-income countries.”

Meanwhile, in another report out this week, the IMF said that for now, the global economy was in a better position than it was back in 2008, although we’re certainly not out of the woods altogether.

“While market participants see recession probabilities as high, they also expect the depth of the recession to be modest,” the IMF said, although it added that if inflation continued to rise, the outlook could worsen.

“Stresses could then re-emerge in the financial system,” it said.

Treasurer Jim Chalmers weighed in on the IMF’s predictions, noting Australia “won’t be completely immune” from the economic fallout to come.

Advanced economies were expected to see an ‘especially pronounced growth slowdown’. Picture: NCA NewsWire/Joel Carrett

“But we do have some big ­advantages including low unemployment, the beginning of wages growth, and some really good prices for our exports,” he told Sky News on Tuesday.

“We’re laying the foundations for future growth in our economy but we’re also making sure our economy is more resilient to these kinds of international shocks.”

He added that next month’s budget would be “as closely aligned as possible with the economic conditions that we confront here at home but also around the world”.

“Budget responsibility is key and within those constraints, doing what we can to help people through a difficult period,” he said.

‘High risk’ of downturn

The IMF report comes after an Econosights report by AMP senior economist Diana Mousina last month warned that “predictions of an approaching recession have become a consensus forecast”.

Ms Mousina noted that the gloomy outlook reflected a global period of “sharp and fast interest rate hikes” – which Australia is no stranger to after 10 consecutive rate rises.

She said “history tells us that there is a good chance that the end of central bank’s tightening cycle will result in some sort of crisis or downturn” as they desperately try and get inflation under control.

She added that “many traditional recession indicators are pointing to a high risk of a downturn”, but added it wasn’t yet a given because at the moment.