The International Monetary Fund (IMF) states that the world is in chaos. A third of the world’s economy has even been hit by recession for two consecutive quarters. Therefore, the IMF advises central banks to focus on recovery.
IMF Chief Economist Pierre-Olivier Gourinchas said the global economy continued to face severe challenges, due to Russia’s invasion of Ukraine, the crisis in the cost of living due to persistent and widespread inflationary pressures, and the slowdown in China.
“The 2023 slowdown will be broad-based, with countries that account for about a third of the global economy poised to contract this year or next,” Gourinchas said at the WEO press conference, quoted Wednesday (12/10/2022).
Gourinchas expects the three largest economies, the United States, China, and the Euro area to be under pressure.
Overall, he continued, this year’s shock will reopen the economic wounds that have only partially healed after the pandemic.
He stated that the worst is yet to come and some people will feel a recession in 2023.
One thing that Gourinchas has highlighted is the pressure of rising prices for goods and services. This, he said, would be the most pressing threat to current and future prosperity.
If allowed to drag on, this condition could threaten real income and undermine macroeconomic stability.
Therefore, he believes the central bank should now focus on restoring price stability, and the pace of monetary tightening has increased sharply.
However, he cautioned that there is a risk of too weak and too strong a tightening. Weak tightening has only further strengthened inflation, eroded the credibility of the central bank, and driven inflation expectations out of control.
“As history teaches us, this will only increase the cost of controlling inflation,” Gourinchas said.
Meanwhile, aggressive monetary tightening could trigger the global economy into a severe recession.
“Financial markets may also struggle with tightening (monetary) too fast. However, the costs of this policy error are not symmetrical. The central bank’s hard-earned credibility can be undermined,” he said.
In the end, this aggressive move by the central bank will only damage macroeconomic stability. The IMF views financial policy as having to ensure that markets remain stable.
“However, the central bank still needs to stick to monetary policy that is firmly focused on taming inflation,” he concluded.