The global economy continues to face steep challenges, shaped by the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China.

IMF’s latest forecasts project global growth to remain unchanged in 2022 at 3.2 percent and to slow to 2.7 percent in 2023—0.2 percentage points lower than the July forecast—with a 25 percent probability that it could fall below 2 percent.

More than a third of the global economy will contract this year or next, while the three largest economies—the United States, the European Union, and China—will continue to stall.

In short, the worst is yet to come, and for many people 2023 will feel like a recession. Russia’s invasion of Ukraine continues to powerfully
destabilize the global economy. Beyond the escalating and senseless destruction of lives and livelihoods, it has led to a severe energy crisis in Europe that is sharply increasing costs of living and hampering economic activity.

Gas prices in Europe have increased more than four-fold since 2021, with Russia cutting deliveries to less than 20 percent of their 2021 levels, raising the prospect of energy shortages over the next winter and beyond.

More broadly, the conflict has also pushed up food prices on world markets, despite the recent easing after the Black Sea grain deal, causing
serious hardship for low-income households worldwide, and especially so in low-income countries.

Persistent and broadening inflation pressures have triggered a rapid and synchronized tightening of monetary conditions, alongside a powerful appreciation of the US dollar against most other currencies.

Tighter global monetary and financial conditions will work their way through the economy, weighing demand down and helping to gradually subjugate inflation.

So far, however, price pressures are proving quite stubborn and a major source of concern for policymakers.

″We expect global inflation to peak in late 2022 but to remain elevated for longer than previously expected, decreasing to 4.1 percent by 2024″. In China, the frequent lockdowns under its zero COVID policy have taken a toll on the economy, especially in the second quarter of 2022.

Furthermore, the property sector, representing about one-fifth of economic activity in China, is rapidly weakening. Given the size of China’s economy and its importance for global supply chains, this will weigh heavily on global trade and activity.

The external environment is already very challenging for many emerging market and developing economies. The sharp appreciation of the US dollar adds significantly to domestic price pressures and to the cost-of-living crisis for these countries.

Capital flows have not recovered, and many low-income and developing economies remain in debt distress. The 2022 shocks will re-open economic wounds that were only partially healed following the pandemic.

Downside risks to the outlook remain elevated, while policy trade-offs to address the cost-of-living crisis have become acutely challenging.

The risk of monetary, fiscal, or financial policy miscalibration has risen sharply at a time when the world economy remains historically fragile and financial markets are showing signs of stress.

Increasing price pressures remain the most immediate threat to current and future prosperity by squeezing real incomes and undermining macroeconomic stability.

Central banks around the world are now laser-focused on restoring price stability, and the pace of tightening has accelerated sharply. There are risks of both underand over-tightening. Under-tightening would entrench further the inflation process, erode the credibility of central banks, and de-anchor inflation expectations.

As history repeatedly teaches us, this would only increase the eventual cost of bringing inflation under control. Over-tightening risks pushing the global economy into an unnecessarily harsh recession.

As several prominent voices have argued recently, over-tightening is more likely when central banks act in an uncoordinated fashion. Financial markets may also struggle to cope with an overly rapid pace of tightening.

Yet, the costs of these policy mistakes are not symmetric. Misjudging yet again the stubborn persistence of inflation could prove much more detrimental to future macroeconomic stability by gravely undermining the hard-won credibility of central banks.

As economies start slowing down, and financial fragilities emerge, calls for a pivot toward looser monetary conditions will inevitably become
louder. Where necessary, financial policy should ensure that markets remain stable, but central banks around the world need to keep a steady hand with monetary policy firmly focused on taming inflation.