Worst is yet to come for global economy, warns IMF

The ‘worst is yet to come’ for the global economy as sky-high inflation and rising interest rates spark turmoil on financial markets, the International Monetary Fund (IMF) warned yesterday.

As the pound tumbled on another bleak day for the UK currency, the Washington-based fund warned of a ‘disorderly repricing’ of a multitude of assets.

‘There certainly are many vulnerabilities out there,’ said Tobias Adrian, director of the IMF’s monetary and capital markets department. ‘When interest rates increase very rapidly, these vulnerabilities are exposed.

‘It’s difficult to think of a time where uncertainty was so high.

‘We have to go back decades to see so much conflict in the world, and at the same time inflation is extremely high.’

The comments came as Britain struggles to contain extreme volatility on the bond markets that has plunged the country’s pensions industry into crisis and pushed up borrowing costs for the Government, businesses and households.

Bank of England efforts to restore order threatened to be undermined last night when Governor Andrew Bailey said that emergency intervention in the gilt markets would not be extended beyond Friday.

His warning sent the pound back below $1.10 and set the scene for further turmoil on the currency and bond markets in the coming days.

At the same time, IMF deputy managing director Gita Gopinath said a third of the global economy faces recession this year or next.

The IMF said a host of issues, from the war in Ukraine and China’s zero-Covid policy to sky-high inflation and rising interest rates, meant that the world economy would grow by just 2.7 per cent next year following an expansion of 3.2 per cent this year.

In Britain, output is set to rise by a better-than-expected 3.6 per cent this year, making it the fastest-growing economy in the G7 group for a second year running.

But growth will slow to just 0.3 per cent next year.

This would be ahead of only Germany and Italy in the G7 – both countries are due to suffer contractions in 2023. 

While the IMF said growth in the UK could be stronger still thanks to the tax-cutting mini-Budget, it warned this would stoke inflation, prolonging the cost of living crunch.

And it said there was a 15 per cent chance global growth could fall below 1 per cent, which would result in a recession that would be ‘very, very painful for a lot of people’.

Warning that 2023 could be the ‘darkest hour’ for the global economy, IMF chief economist Pierre-Olivier Gourinchas said: ‘Things are really not looking good.’ He added: ‘The three largest economies, the United States, China and the euro area, will continue to stall.

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

‘As the global economy is headed for stormy waters, financial turmoil may well erupt, prompting investors to seek the protection of safe-haven investments, such as US Treasuries, and pushing the dollar even higher.’