Three triggers could push the global economy into an extreme scenario, IMF warns

Three triggers could push the global economy into an extreme scenario, IMF warns. Ahead of the IMF and World Bank Spring Meetings, the International Monetary Fund downgraded its growth forecast and warned of a grim scenario: the world faces the risk of the slowest growth since the 2009 and 2020 crises. According to Die Welt, on April 15 in Washington, German Finance Minister Lars Klingbeil would face questions from international colleagues about Germany’s latest rescue packages. The IMF says that fuel tax cuts and cash handouts to curb inflation (the 1,000 euro) by the ruling coalition are misguided steps. The IMF argues that policy responses to energy-price shocks from the Iran conflict should be more targeted. IMF Managing Director Kristalina Georgieva says fiscal policy should focus only on targeted and time-limited assistance to groups most affected. She notes that the measures announced by the German government are temporary and not focused on the most vulnerable. Chief Economist Pierre-Olivier Gourinchas emphasized that maintaining price signals is essential: high prices are a sign of scarcity, helping restrain demand and stimulate supply. Due to the Middle East conflict, global energy supply is tightening. Non-targeted interventions such as price caps or broad subsidies, while popular, are often ineffective and costly. The IMF notes that the shock has abruptly halted the global recovery. In the World Economic Outlook, the IMF lowers this year’s growth forecast to 3.1% in the most optimistic scenario, from 3.3% expected before the war; inflation is projected to rise to 4.4%, from 3.8% previously — marking a break in the downward inflation trend maintained over many years. The baseline scenario comes with prerequisites: the conflict must end soon, the Hormuz Strait—the world’s most important oil trade route—must be open, and damaged infrastructure must be rapidly repaired. That is only the optimistic scenario. The outlook becomes bleaker if instability persists or escalates. In the extreme scenario, IMFForecast global growth could fall to 2%—a level this century has only seen twice: the 2009 financial crisis and the COVID-19 pandemic in 2020. Inflation could surge to 6%. The IMF has not yet published country-by-country data for this scenario. The IMF notes that the global crisis would affect the economy via three channels: first, energy and commodity prices surge, raising production and transportation costs and stressing supply chains; second, a wave of secondary inflation as firms and workers raise prices and demand higher wages; third, financial markets could exacerbate the shock as asset prices fall, risk spreads widen, capital flows reverse, and the USD strengthens, tightening global financial conditions and dampening demand. IMF experts in Washington warn that the current apparent stability in international stock markets may be illusory. The extreme scenario is a warning to finance ministers and central bank governors: resolve the Middle East conflict early, or the situation could deteriorate further. Georgieva warns about food security in the Middle East and parts of Africa: even in the optimistic scenario, returning to pre-crisis stability seems unlikely, as the root cause remains energy-price and fertilizer shocks. For central banks, the IMF notes they are in a delicate position. Gourinchas argues that as long as inflation expectations stay under control, policymakers do not necessarily need to raise rates and may “look past” energy-price increases. However, if medium- and long-term inflation expectations rise due to price and wage dynamics, the top priority should be restoring price stability quickly through swift monetary tightening rather than pursuing short-term growth. —Thuy Linh