A third of the global economy is expected to be in recession in 2023

A third of the global economy will be in recession this year, warns the head of the International Monetary Fund (IMF).

Kristalina Georgieva stated that 2023 will be ‘harder’ than last year as the US, EU, and China feel the economic slowdown. The war in Ukraine, rising prices, higher interest rates, and the spread of Covid-19 in China are burdening the global economy, and the IMF downgraded its growth outlook for the global economy in 2023 back in October.

– We expect that one third of the world economy will be in recession – Georgieva said in CBS’s ‘Face the Nation’ news program.

Katrina Ell, an economist at Moody’s Analytics in Sydney, provided her assessment of the global economy to the BBC.

– Although our baseline avoids a global recession over the next year, the risks are uncomfortably high. Europe, however, will not avoid recession, and the US is on the brink – she said.

The IMF downgraded its outlook for global economic growth in 2023 due to the war in Ukraine, as well as higher interest rates as central banks around the world try to rein in rising prices. Since then, China has lifted its zero-Covid-19 policy and started reopening its economy, although the coronavirus infection has spread rapidly in the country.

Georgieva warned that China, the world’s second-largest economy, will face a tough start to 2023.

It is worth noting that the IMF is an international organization with 190 member countries working together to stabilize the global economy. One of its key roles is to act as an ‘early economic warning system’.

Georgieva’s comments are a warning for people around the world, not just in Asia, which has already gone through a very tough year. Inflation is steadily rising across the region, mainly due to the war in Ukraine, and elevated interest rates have also hit households and businesses.

Figures released over the weekend pointed to weakness in the Chinese economy at the end of 2022. The official Purchasing Managers’ Index (PMI) for December showed that factory activity in China shrank for the third consecutive month, and at the fastest pace in nearly three years as the coronavirus infection spreads in factories across the country.

‘Interest rates are not falling as quickly as some think’

In the same month, house prices in 100 cities fell for the sixth consecutive month, according to a survey by one of the largest independent real estate research firms in the country, China Index Academy. On Saturday, in his first public comments since the policy change, Chinese President Xi Jinping called for ‘more efforts and unity’ as China enters what he termed a ‘new phase’.

The decline in the US also means less demand for Chinese and other Asian products. Higher interest rates also make borrowing more expensive, so companies may decide not to invest in expanding their businesses.

The lack of growth may prompt investors to pull money out of the economy, leaving countries, especially poorer ones, with less money to pay for essential imported goods like food and energy. In such slowdowns, currencies can lose value against those in more prosperous economies, further exacerbating the problem.

The impact of higher interest rates on loans also affects economies at the national level, particularly emerging markets, which may struggle to repay their debts.

For decades, the Asia-Pacific region has relied on China as a key trading partner and economic support during crises. Now, Asian economies are facing lasting economic consequences due to how China is handling the pandemic.

Production of items like Tesla’s electric cars and Apple’s iPhones could soon get back on track as Beijing ends its zero-Covid-19 policy. However, renewed demand for commodities like oil and iron ore is likely to further increase prices just as it seemed inflation had peaked.

– Although labor markets around the world are quite strong, the jobs being created are not necessarily well-paid, and we will have a recession; we will not see interest rates falling as quickly as the markets think – said Bill Blaine, strategist and head of the alternative assets department at Shard Capital to the BBC.

– This will create a whole range of consequences that will keep the markets in doubt at least in the first half of 2023 – he concluded.