Photograph: Bianca de Marchi/AAP
Central bankers around the world that are so desperate to kill inflation they are willing to risk a global recession seem about to get their wish as the IMF has dramatically downgraded growth around the world for the next two years.
If you want to get a taste of how well (or badly) the global economy is doing, you can do worse than just check out the titles of the regular World Economic Updates issued by the IMF.
For example, in October 2017 it optimistically had the title of “Seeking sustainable growth”. But optimism never lasts for too long and so a year later the outlook title was “Challenges to steady growth”.
At least the steady growth was here though, right? Right??
Nope. By January 2019 the title was “A weakening global expansion amid growing risks” followed in April with “Growth slowdown, precarious recovery” and July’s rather uninspiring “Still sluggish global growth”.
Then in January 2020 things were on the up again and the IMF went with the title “Tentative stabilization, sluggish recovery?”
Fortunately, nothing happened after that which in any way endangered that recovery … oh wait, sorry, I am getting a message that yes, something big did actually happen right after January 2020.
And thus, in the April 2020 outlook we had the title “The great lockdown” and then in June “A crisis like no other, an uncertain recovery”.
But all things must pass and so two years ago, in October 2020, the IMF was talking of “A long and difficult ascent” and a year ago it was “Recovery during a pandemic”.
Whew. A recovery. We can dust off our hands and declare victory!
Oh wait, I am getting another message …
The April outlook this year went with “War sets back the global recovery” and in July the title might have had you looking to the sky and wondering just when the meteor is going to arrive: “Gloomy and more uncertain.”
And then on Wednesday morning the latest outlook was released. Its headline? “Countering the cost-of-living crisis.”
The report doesn’t bury the lede either. It opens by noting “The global economy continues to face steep challenges, shaped by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.”
But hey, apart from that …
It means the IMF has downgraded growth for the major economies for this year from its estimate in April of 3.2% to 2.0% and for next year from 2.2% to a woeful 0.8%:
If the graph does not display click here
And Australia has also been hit with downgraded growth – all the way out to 2026:
If the graph does not display click here
It rather encapsulates our weird time. Unemployment is essentially at a 50-year low and yet people are worried about a recession.
The latest ANZ-Roy Morgan consumer confidence survey has Australia consumers rather gloomy:
If the graph does not display click here
And of course we know why: inflation. Or more the fear of inflation and what is being done to stop it. So fearful of inflation are central banks around the world, they are nearing the economic equivalent of destroying the village in order to save it.
If a recession is what is needed, then so be it.
The head of the US Federal Reserve, Jerome Powell, suggested last month: “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t”; and: “We don’t know, no one knows, whether this process will lead to a recession or if so, how significant that recession would be.”
So yes, people are right to be worried.
What might cause a global recession is the fast-rising interest rates – the most brute force way to slow the economy and thus slow demand for goods and services and reduce pressure on rising prices.
In the US, UK, Canada and Australia, official interest rates have risen by more than 200 basis points in 12 months:
If the graph does not display click here
The US Federal Reserve target rate has gone up 300 basis points in seven months. The last time rates in the US went up that fast was in 1981. And the US of course then went into a devastating recession.
But don’t worry, since then the US Federal Reserve has been careful. For example, in 1989 it only raised rates by 200 basis points in a year … and then the US economy again went into a recession.
But hey, maybe third time’s a charm?
Alas, the betting is that once again a recession is to follow steeply rising rates.
US Treasury bond yields (or interest rates) are now cheaper for 10-year bonds than they are for two-year ones. This suggests investors are more worried about what is about to happen than the long-term future:
If the graph does not display click here
Currently the market is not predicting a recession here, but historically we follow where the US goes:
If the graph does not display click here
And things are looking gloomy here as well as the IMF is now predicting Australia’s economy in 2023 and 2024 will grow by less than 2% each year. When that has happened in the past, we have had a recession:
If the graph does not display click here
That sort of limp growth would normally require fiscal stimulus and yet given the current concerns about inflation we are unlikely to see a big-spending budget in two weeks’ time.
The world is in a tough spot and as a result, so too are we.
• Greg Jericho is a Guardian columnist and policy director at the Centre for Future Work
