The International Monetary Fund is downgrading its outlook for the world economy for 2023, citing a long list of threats that include Russia's war against Ukraine, chronic inflation pressures, punishing interest rates and the lingering consequences of the global pandemic.

"We have high inflation and the deteriorating global economic outlook. At the same time, we have geopolitical risks with economic spillovers from the war in Ukraine. On top of all of this, global financial conditions have tightened as central banks continue to raise interest rates," Tobias Adrian, IMF's financial counsellor, announced Tuesday in Washington, D.C., following the release of the report.

The 190-country lending agency forecast that the global economy would eke out growth of just 2.7% next year, down from the 2.9% it had estimated in July. The IMF left unchanged its forecast for international growth this year — a modest 3.2%, a sharp deceleration from last year's 6% expansion.

The bleaker forecast was no surprise. IMF Managing Director Kristalina Georgieva, noting the grim backdrop to this week's fall meetings of the IMF and the World Bank in Washington, warned that the "risks of recession are rising'' around the world and that the global economy is facing a "period of historic fragility.''

In its latest estimates, the IMF slashed its outlook for growth in the United States to 1.6% this year, down from a July forecast of 2.3%. It expects meager 1% U.S. growth next year.

The fund foresees China's economy growing just 3.2% this year, down drastically from 8.1% last year. Beijing has instituted draconian zero-COVID policy and has cracked down on excessive real estate lending, disrupting business activity. China's growth is forecast to accelerate to 4.4% next year, still tepid by Chinese standards.

In the IMF's view, the collective economy of the 19 European countries that share the euro currency, reeling from crushingly high energy prices caused by Russia's attack on Ukraine and Western sanctions against Moscow, will grow just 0.5% in 2023.

"Looking at the global banking sector, we can see that it has withstood the pressures up to now, helped by high levels of capital and ample liquidity. However, the IMF's global bank stress test shows that these buffers may not be enough for some banks," Adrian said.

The world economy has endured a wild ride since COVID-19 hit in early 2020. First, the pandemic and the lockdowns it generated brought the world economy to a standstill in the spring of 2020. Then, vast infusions of government spending and ultra-low borrowing rates engineered by the Federal Reserve and other central banks fueled an unexpectedly strong and speedy recovery from the pandemic recession.

But the stimulus came at a high cost. Factories, ports and freight yards were overwhelmed by powerful consumer demand for manufactured goods, especially in the United States, resulting in delays, shortages and higher prices. (The IMF expects worldwide consumer prices to rise 8.8% this year, up from 4.7% in 2021.)

Mounting recession fears
In response, the Fed and other central banks have reversed course and begun raising rates dramatically, risking a sharp slowdown and potentially a recession. The Fed has raised its benchmark short-term rate five times this year. Higher rates in the United States have lured investment away from other countries and strengthened the value of the dollar against other currencies.

"We see that rising interest rates have brought on additional stress. Both governments facing high debt levels, as well as non-bank financial institutions such as insurance companies, pension funds and asset managers dealing with stretched balance sheets," Adrian said, adding that "the strains are particularly severe for smaller developing economies."

Outside the U.S., the stronger dollar makes imports that are sold in the American currency, including oil, more expensive and therefore heightens global inflationary pressures. It also forces foreign countries to raise their own rates — and burden their economies with higher borrowing costs — to defend their currencies.

A global "recession coupled with high inflation," according to the IMF counsellor, would cause "up to 29% of bank assets in emerging markets" to exceed capital requirements. "At the same time, most banks in advanced economies would pull through," he said.

Maurice Obstfeld, a former IMF chief economist who now teaches at the University of California, Berkeley, has warned that an overly aggressive Fed could "drive the world economy into an unnecessarily harsh contraction.''

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