The International Monetary Fund slashed its growth forecasts for the United States and global economies.
The IMF announced on Tuesday that the world economy is facing an “increasingly gloomy and uncertain outlook” given the war in Ukraine and fallout from the pandemic. It revised down projections for U.S. growth for this year to 2.3% and just 1% next year.
On a global scale, the IMF projects that economic growth will slow considerably from last year’s 6.1% rate to 3.2% this year and 2.9% next year. Those are downward revisions of 0.4 and 0.7 percentage points from its April forecast, respectively.
U.S. GDP decreased at a 1.6% annual rate in the first quarter after a year of explosive growth, and all eyes are on Thursday’s report from the Bureau of Labor Statistics that will show whether the economy grew or contracted in the second quarter.
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Two consecutive quarters of contraction generally signal a recession, although the picture is complicated by the strong labor market and other positive economic indicators.
In other bad news, while growth was revised down, inflation forecasts were revised upward. Inflation this year is expected to climb to 6.6% in advanced economies and 9.5% in emerging market and developing economies — upward revisions of 0.9 and 0.8 percentage points, respectively.
U.S. inflation is the worst it has been in four decades. Inflation as measured by the consumer price index ballooned a whopping 9.3% in the 12 months ending in July — more than anticipated. Rising energy prices accounted for half the total inflation, with the gasoline index rising 11.2%.
“Inflation at current levels represents a clear risk for current and future macroeconomic stability and bringing it back to central bank targets should be the top priority for policymakers,” the report said. “In response to incoming data, central banks of major advanced economies are withdrawing monetary support faster than we expected in April, while many in emerging market and developing economies had already started raising interest rates last year.”
The IMF called the synchronicity of the global monetary tightening cycle “historically unprecedented.” The international organization said that the downside risks of economic growth stagnating and delaying the tightening of monetary policy would only make the economic situation worse in the long run.
“Central banks that have started tightening should stay the course until inflation is tamed,” the IMF said.
Federal Reserve Chairman Jerome Powell and other Fed officials have insisted they intend to keep raising interest rates until inflation comes under control.
Last month, the central bank raised its interest rate target to three-fourths of a percentage point — a hike that is akin to three normal rate hikes at once. The Fed is set to meet on Tuesday and Wednesday and is expected to jack up rates at the same aggressive pace once more, showing just how resolved Fed officials are about reining in prices.
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Speaking before Congress for the first time since the Fed conducted its biggest rate hike in nearly three decades, Powell said the Fed wouldn’t ease off on hiking rates until it sees proof inflation is indeed coming down.
“At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” he said. “We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.”
