Make Kitco Your Homepage

IMF: 'The worst is yet to come' as 2023 will feel like a recession for many

Kitco News

(Kitco News) The International Monetary Fund (IMF) warned that 2023 will feel like a recession for many as it cut its global growth outlook for the next year, stating "the worst is yet to come."

The updated forecast sees global growth at 2.7% next year, down from the July forecast of 2.9% and January's estimate of 3.8%. On top of that, there is a 25% chance that growth can still slow to less than 2%, the IMF said in its World Economic Outlook released Tuesday. For 2022, the global growth projection remained unchanged at 3.2%.

"Overall, this year's shocks will re-open economic wounds that were only partially healed post-pandemic. In short, the worst is yet to come and, for many people, 2023 will feel like a recession," said IMF's chief economist Pierre Olivier Gourinchas. "The 2023 slowdown will be broad-based, with countries accounting for about one-third of the global economy poised to contract this year or next. The three largest economies, the United States, China, and the euro area, will continue to stall."

The IMF pointed out that this is the weakest outlook in the last two decades, with the exception of the global financial crisis and the extreme phases of the COVID-19 pandemic.

On top of the already worrying downgrades, the IMF warned of several downside risks that could deteriorate the outlook further.

These include monetary policy miscalculations by central banks in their fight against inflation, additional energy and food price shocks, emerging market debt distress, a resurgence of COVID-19, and the worsening of China's property sector crisis.

Most of the slowdown will hit the euro area, reducing growth to 0.5% in 2023 as the energy crisis triggered by the war in Ukraine takes a heavy toll.

The U.S. growth is estimated to slow to 1% next year. At the same time, China's economic growth is expected to slow to 4.4% due to a weakening property sector and continued lockdowns.

Inflation will be more persistent than previous estimates, with global inflation estimated to rise to 8.8% in 2022 and then decelerate to 6.5% in 2023 and 4.1% by 2024.

Dollar strength is a major challenge

The U.S. dollar has been trading near 20-year highs, boosted by the Federal Reserve's aggressive tightening and the energy crisis.

"For many emerging markets, the strength of the dollar is a major challenge," the IMF highlighted. "The appropriate response in most emerging and developing countries is to calibrate monetary policy to maintain price stability, while letting exchange rates adjust, conserving valuable foreign exchange reserves for when financial conditions really worsen."

However, low-income countries are already in or near debt distress, and global tightening in financing conditions could exacerbate things.

The updated report was released as finance and central bank chiefs are in Washington for the IMF's annual meetings.

In a separate Global Financial Stability report, also published Tuesday, the IMF noted that risks to financial stability have "materially worsened," adding that markets are at risk of a "disorderly repricing."

"The global environment is fragile with storm clouds on the horizon … The global financial stability outlook has deteriorated since the April 2022 Global Financial Stability Report (GFSR)," said IMF's head of monetary and capital markets Tobias Adrian. "There is a heightened risk of rapid, disorderly repricing which could interact with — and be amplified by — pre-existing vulnerabilities and poor market liquidity."

Gold's reaction

Gold's reaction has been subdued, with the precious metal losing some of its moderate early-morning gains as the U.S. dollar index continued to climb. December Comex gold futures were last at $1,673.80, down 0.08% on the day.

According to analysts, gold remains at risk of another selloff at these levels because of the strong dollar trade.

"Bullion will struggle here as the dollar will easily be supported given the war in Ukraine is intensifying and the financial plumbing abroad is a big risk," said OANDA senior market analyst Edward Moya. "If the bond market selloff continues, gold prices could easily fall back towards the $1,640 level. A policy mistake by the BOE by the end of the week is what might be needed to break below bullion's September lows."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.