IMF Says ‘the Worst Is Yet to Come’ for the Global Economy; How Will This Affect Indonesia?
As usual, we devote our first article to the Indonesian economy. But before we zoom in on the latest macroeconomic data of Indonesia, we first provide some context by discussing the global economy.
It is worthwhile to take a look at the latest reports from the International Monetary Fund (IMF). Over the past few weeks this Washington-based institution released its World Economic Outlook report and Regional Economic Outlook Report for Asia and the Pacific.
In its World Economic Outlook, the IMF warns that the global economy continues to face steep challenges, particularly caused by the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflationary pressures, and the economic slowdown of China (the world’s second-biggest economy). And so, the IMF cut its projection for global economic growth in 2023 from 2.9 percent year-on-year (y/y) to 2.7 percent (y/y). This implies that the slowdown next year is sharper than had been expected earlier.
However, its projection for global economic growth in 2022 remained at 3.2 percent (y/y). While this would be a big decline compared to the growth rate of 6.0 percent (y/y) in 2021, we need to remember that 2021 was the year of the huge economic rebound from COVID-19-crisis-ridden 2020.
The IMF mentions that the global economic slowdown in 2023 will be broad-based, with the United States (US), China, and Euro area continue stalling. And so, “for many people 2023 will feel like a recession”. Meanwhile, shocks that occurred in 2022 re-open economic wounds that were only partially healed post-COVID-19 pandemic.
In the United States it is the tightening of monetary and financial conditions that will slow economic growth to an estimated 1.0 percent (y/y) next year. And in China, it are the weakening property sector and continued COVID-19 lockdowns that do the damage. Lastly, the IMF believes that the slowdown is most pronounced in the Euro area where the (self-imposed) energy crisis takes a heavy toll.
And almost everywhere, the rapidly rising prices, especially of food and energy, are causing serious hardship for households, particularly the poorer households.
Despite the economic slowdown, inflation is proving broader and more persistent than earlier anticipated, with global inflation expected to peak at 9.5 percent (y/y) in 2022 before decelerating to 4.1 percent (y/y) by 2024. Inflationary pressures are also broadening well beyond food and energy. Global core inflation increased from a monthly rate of 4.2 percent (y/y) at end-2021 to 6.7 percent (y/y) in July 2022.
Meanwhile, downside risks to the IMF’s outlook remain elevated, while policy trade-offs to address the cost-of-living crisis have become more challenging. Pierre-Olivier Gourinchas, IMF Chief Economist, said in October 2022: “risks are accumulating, and so we’re expecting about a third of the global economy to be in a technical recession.”
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