In this file photo taken on June 30, 2015 a logo is seen outside the headquarters of the International Monetary Fund in Washington, DC. (BRENDAN SMIALOWSKI / AFP)

WASHINGTON - The International Monetary Fund on Tuesday cut its global growth forecast for 2023 amid colliding pressures from the conflict in Ukraine, high energy and food prices, inflation and sharply higher interest rates, warning that conditions could worsen significantly next year.

The Fund said its latest World Economic Outlook forecasts show that a third of the world economy will likely contract by next year, marking a sobering start to the first in-person IMF and World Bank annual meetings in three years.

"In short, the worst is yet to come, and for many people, 2023 will feel like a recession," IMF chief economist Pierre-Olivier Gourinchas said in a statement.

The IMF said global GDP growth next year will slow to 2.7 percent, compared to a 2.9 percent forecast in July, as higher interest rates slow the US economy and Europe struggles with spiking gas prices.

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The Fund is keeping its 2022 growth forecast at 3.2 percent, reflecting stronger-than-expected output in Europe but a weaker performance in the United States, after torrid 6.0 percent global growth in 2021.

In short, the worst is yet to come, and for many people, 2023 will feel like a recession. 

Pierre-Olivier Gourinchas, IMF chief economist

US growth this year will be a meager 1.6 percent - a 0.7 percentage point downgrade from July, reflecting an unexpected second-quarter GDP contraction. The IMF kept its 2023 US growth forecast unchanged at 1.0 percent.

The IMF said its outlook was subject to a delicate balancing act by central banks to fight inflation without over-tightening, which could push the global economy into an "unnecessarily severe recession" and cause disruptions to financial markets and pain for developing countries. But it pointed squarely at controlling inflation as the bigger priority.

"The hard-won credibility of central banks could be undermined if they misjudge yet again the stubborn persistence of inflation," Gourinchas said. "This would prove much more detrimental to future macroeconomic stability."

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The Fund forecast headline consumer price inflation peaking at 9.5 percent in the third quarter of 2022, declining to 4.7 percent by the fourth quarter of 2023.

A "plausible combination of shocks" including a 30 percent spike in oil prices from current levels could darken the outlook considerably, the IMF said, pushing global growth down to 1.0 percent next year - a level associated with widely falling real incomes.

The IMF put a 25 percent probability of global growth falling below 2 percent next year - a phenomenon that has occurred only five times since 1970 - and said there was a more than 10 percent chance of a global GDP contraction

Other components of this "downside scenario" include a sharp tightening of financial conditions brought on by emerging market currency depreciations and labor markets remaining overheated resulting in lower potential output.

The IMF put a 25 percent probability of global growth falling below 2 percent next year - a phenomenon that has occurred only five times since 1970 - and said there was a more than 10 percent chance of a global GDP contraction.

Dollar pressures

These shocks could keep inflation elevated for longer, which in turn could keep upward pressure on the US dollar, now at its strongest since the early 2000s. The IMF said this is pressuring emerging markets, and further dollar strength could increase the likelihood of debt distress for some countries.

Emerging market debt relief is expected to be a major topic of discussion among the world's global financial policymakers at the Washington meetings, and Gourinchas said now was the time for emerging markets to "batten down the hatches" to prepare for more difficult conditions.

The appropriate policy for most was prioritizing monetary policy for price stability, letting currencies adjust and "conserving valuable foreign exchange reserves for when financial conditions really worsen."

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