The global economy is facing a growing risk of recession as inflation, energy and banking crises threaten to derail the recovery from the pandemic. A series of warning signs have emerged in recent weeks, indicating that the world economy is losing momentum and could slip into a downturn in 2023.
Inflation pressures mount
One of the main challenges facing the global economy is the surge in inflation, which has reached its highest level in decades in some countries. High inflation erodes the purchasing power of consumers and businesses, and forces central banks to raise interest rates to contain price pressures. Higher interest rates, in turn, increase the cost of borrowing and dampen economic activity.
According to the International Monetary Fund (IMF), global inflation is expected to average 5.9% in 2022, up from 3.6% in 20211. The IMF has warned that inflation could persist longer than expected, especially if supply chain disruptions and labor shortages are not resolved soon1.
In the United States, consumer prices rose 8.6% in November from a year ago, the largest increase since 19822. The Federal Reserve has signaled that it will accelerate the tapering of its bond-buying program and start raising interest rates as soon as March 2023 to combat inflation3. However, some analysts fear that the Fed may be behind the curve and that its policy tightening could trigger a recession.
Energy crisis worsens
Another factor that is weighing on the global economy is the energy crisis, which has caused a spike in oil and gas prices and a shortage of electricity in some regions. The energy crisis is partly driven by the mismatch between supply and demand, as the recovery from the pandemic has boosted energy consumption while production has lagged behind. The energy crisis is also exacerbated by geopolitical tensions, such as the dispute between Russia and Ukraine over natural gas transit4.
The high energy prices have added to inflation pressures and reduced disposable income for consumers and businesses. The energy shortage has also disrupted industrial production and threatened to cause blackouts in some countries, such as China, India and South Africa4. The IMF has estimated that the energy crisis could shave off 0.75 percentage points from global growth in 20221.
Banking crisis looms
A third challenge facing the global economy is the potential banking crisis, which could result from the combination of higher interest rates, lower asset prices and rising corporate defaults. The banking sector is vulnerable to shocks, as it holds large amounts of debt and leveraged loans that could become distressed if economic conditions deteriorate.
The IMF has warned that the global financial system faces increased risks of instability and contagion, as market valuations are stretched and investor sentiment is fragile. The IMF has also cautioned that some emerging markets could face capital outflows and currency pressures if the Fed tightens monetary policy faster than expected.
One of the flashpoints for a banking crisis is China, where the property sector is facing a liquidity crunch and a wave of defaults. The property sector accounts for about a quarter of China’s GDP and a third of its bank loans. The collapse of China’s second-largest property developer, Evergrande Group, has raised fears of a domino effect on other developers, banks and investors.
The global economy is facing a triple threat of inflation, energy and banking crises that could push it into a recession in 2023. The IMF has lowered its global growth forecast for 2023 to 4.1%, down from 4.9% in October1. The IMF has also warned that downside risks have increased significantly, and that policy coordination and cooperation are needed to avoid a worse outcome1.