The world economy is scratching the recession – Economy

Inflation in the West, a zero-Covid strategy in China and, above all, the war in Ukraine: According to a new forecast by the International Monetary Fund (IMF), the global economy is on the way to recession. The economists from Washington are only assuming global growth of 3.2 percent for this year. That’s 0.4 points lower than the target they had given in their last prediction in April. For the coming year, they are still assuming growth of 2.9 percent, a drop of 0.7 points.

And the figures mentioned are even the comparatively optimistic scenario. Because after all the fears from the April forecast have materialized, the fund also offers a “plausible alternative scenario”. Accordingly, global economic output would only increase by 2.6 percent this year and by 2.0 percent next year. For that to happen, Russia would have to turn off the gas supply to Europe completely, inflation would have to rise even more and governments would have to embark on an austerity course, as in the euro crisis, and stop supporting the economy with programs worth billions. The world economy would then find itself in one of the worst periods of the past fifty years.

Germany, which is particularly exposed to falling energy exports from Russia and weakening global demand for export goods, would be particularly at risk. This is underpinned by the latest survey by the Ifo Institute on sentiment in German foreign trade, which clouded over significantly in July. “The gas shortage affects the outlook,” explains the institute. The IMF predicts growth of 1.2 percent for Germany this year and 0.8 percent next year. That is 0.9 or 1.9 percentage points less than three months ago, the strongest correction among the euro countries.

Rising energy prices are driving up production costs for companies and draining household wallets. In addition, the Ukraine war is causing food shortages, which is causing inflation to rise further. The wage increases cannot keep pace, people can afford less. The IMF has corrected its inflation forecast for the euro zone significantly upwards to 7.3 percent and even warns of a possible “stagflation” – a stagnating economy combined with high inflation, a vicious circle from which national economies can only break out with difficulty.

In this scenario, the European Central Bank fails to act as the savior in an emergency. To combat inflation, all it can do is raise interest rates and stop pumping trillions of euros into the economy through bond-buying programs. However, if the governments, already heavily indebted as a result of the pandemic stimulus programs, can no longer afford new support packages due to falling tax revenues and higher financing costs and start to save, the domestic economy threatens to collapse completely.

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After the last global economic crisis in 2008, it was China’s economy that pulled the cart out of the mud. However, the Germans cannot rely on this this time, because the Chinese government is currently busy fighting the pandemic. The recent corona lockdowns there are causing further supply chain chaos, factory closures and a slump in demand. The important real estate sector, which Beijing had slowed down in recent years for fear of a debt bubble, is also no longer gaining momentum. The IMF has therefore lowered its growth forecast for China this year to 3.3 percent. The economists write that these are the worst prospects for Germany’s most important trading partner in more than four decades. However, they left out 2020, the first year of the corona pandemic.

Even with Germany’s second largest economic partner, the USA, things are not going as hoped. The people there are also affected by the general rise in prices, because of rising interest rates they can incur fewer debts. The IMF is still assuming growth of 2.3 percent this year, which is a third less than the last forecast.

Russia is coming through the crisis better than expected

Russia, on the other hand, is in a better position than predicted: high energy prices are making government revenues soar and strict capital controls have prevented the collapse of the banking sector despite western sanctions. According to the IMF, the Russian economy will shrink “only” by six percent this year. This is of little help to Germany, however, since business with Russia, apart from the energy sector, has largely come to a standstill.

How is the global economy supposed to get out of the impending crisis? Close your eyes and through, advise the IMF economists. They are calling on the central banks to “decidedly” raise key interest rates, even if this costs growth in the short term, means higher unemployment and lower wages. Although the poorest and most vulnerable suffer the most, the economists argue that a hard cut now “avoids abrupt and disruptive adjustments later.” At the same time, the IMF speaks out against price controls on energy and food, since experience has shown that these “reduce supply”. Instead, governments should specifically help those in need through transfers to mitigate the rising cost of living.