WASHINGTON: The global economy is facing a worrisome slowdown, but the critical priority for policymakers is to bring raging inflation under control, the International Monetary Fund’s (IMF) chief economist said yesterday (July 26).
With price surges in major economies approaching 10%, central banks must stay the course and continue to raise interest rates until inflation retreats, Pierre-Olivier Gourinchas told AFP in an interview.
The IMF’s updated World Economic Outlook offered a gloomy picture of the global economy, which is slowing sharply and faced with a series of risks that could push it into recession.
Soaring prices for food and fuel, exacerbated by the war in Ukraine, have been squeezing family budgets worldwide, and even leading to unrest in some countries.
Aggressive moves by central bankers, including the US Federal Reserve and the European Central Bank, are aimed at taming those price pressures, but will also slow the economy.
However, Gourinchas warned that allowing inflation to get out of control is “like (letting) the genie out of the bottle”.
If people come to expect inflation will remain high, “this will be a world in which central banks have lost the plot. And it will be very, very difficult to walk that back”.
But fortunately, “we’re not there” yet, he said.
So far, “inflation expectations have remained quite stable. And this is one of the great benefits of having had decades of low inflation environment and credibility by central banks”.
He acknowledged that there is a risk policymakers will do too much and slam the brakes on growth, but so far they are on the right track.
“The point is not to inflict a recession on the global economy,” he said. “The point is to bring back price stability.”
The goal is to bring inflation back down close to 2% for advanced economies, maybe a bit more for emerging market economies, and even if rate increases go too far and slow growth, that would mean more rapid price declines, Gourinchas said.
Some of the primary risks facing the global economy are beyond the control of policymakers, including the potential for Russia to shut off gas supplies to Europe.
But despite the very real possibility that the worst-case scenario comes to pass, Gourinchas nevertheless sees some signs of hope.
Oil prices, which skyrocketed to nearly US$129 a barrel in March, have been easing in recent weeks due to the expectations of a global economic slowdown, and were back to below US$105 yesterday for Brent, the European benchmark.
There have been “synchronised” moves by central banks around the world, including emerging markets, so “we could see a much faster disinflation path if the energy prices are to continue on that trend:, Gourinchas said.
And policymakers in emerging market economies have so far reacted well, allowing their currencies to adjust.
“Their policy frameworks have improved over the years,” he said.
On Russia, the IMF said that despite damaging Western sanctions imposed on Moscow in the wake of the invasion of Ukraine, the Russian economy appears to be weathering the storm better than expected as it benefits from high energy price.
The sanctions were meant to sever Russia from the global financial system and choke off funds available to Moscow to finance the war.
But the IMF’s latest World Economic Outlook upgraded Russia's gross domestic product estimate for this year by a remarkable 2.5 percentage points, although its economy is still expected to contract by 6%.
“That’s still a fairly sizeable recession in Russia in 2022,” Gourinchas told AFP in an interview.
A key reason that the downturn was not as bad as expected was that “the Russian central bank and the Russian policymakers have been able to stave off a banking panic or financial meltdown when the sanctions were first imposed,“ he said.
Meanwhile, rising energy prices are “providing an enormous amount of revenues to the Russian economy”.
Despite the sanctions, Russia’s “domestic demand is also showing some resilience” due to government support.
But Gourinchas said “there is no rebound” ahead for Russia. “In fact,” the IMF is “revising down the Russian growth in 2023 1.2 points lower than the April forecast for a contraction of 3.5%. – AFP