Germany and Italy will enter recession in 2023, becoming the first advanced economies to contract as a result of Russia’s invasion of Ukraine, according to an IMF prediction released on Tuesday. While the eurozone will avoid a recession, the production of the 19-nation single currency region will sputter to 0.5% growth, which is weaker than the IMF’s earlier prediction.
The battle on Europe’s eastern flank has caused inflation to skyrocket and oil costs to surge, compelling the European Central Bank to raise interest rates to chill the economy, despite the possibility of triggering a recession. Germany, the largest economy in Europe, has paid dearly for its significant reliance on Russian gas, which it believes was cut off in revenge for Western sanctions over the conflict.
In an update to its World Economic Outlook from July, the IMF now expects the German economy to contract by 0.3% in 2023, although it had previously predicted a 0.8% expansion. Italy, whose sectors are likewise reliant on gas imports, will see its gross domestic product decline by 0.2%, a steep decline from July’s 0.9% expansion. In the updated forecast of the International Monetary Fund, Germany and Italy are the only advanced economies expected to enter recession in 2022.
According to the IMF, the spillover effects of the Ukraine crisis will lead to weak growth in Europe in 2023, with the most significant downward revisions for economies most affected by Russian sanctions. gas supply restrictions.” as well as the paper identified “tighter financial conditions, with the European Central Bank having completed net asset purchases and rapidly increasing policy rates by 50 basis percentage points in July 2022, and 75 percentage points in September 2022.”
Before the war, economies were recovering from the COVID pandemic, and central bankers anticipated the inflationary increase would be short-lived. However, the situation has worsened since Russia’s incursion into Ukraine on February 24.
The global economy is projected to expand by 2.7% in 2020, 0.2 percentage points less than the IMF’s July prediction. The IMF now predicts that Russia’s sanctions-affected economy will contract by 2.3 percent next year, as opposed to 3.5 percent earlier.
Russia’s gas shortages and skyrocketing utility prices have pushed countries across Europe to implement energy-saving measures, such as recommending people lower their thermostats during the winter and Paris shutting off monument lights earlier, as governments try to find new sources of supplies.
The head economist at Fitch Ratings, Brian Coulton, remarked that the energy shock in Europe is a major issue. “In many ways, the energy shock in the EU is greater than the 1973 oil shock in the United States,” he stated. According to the IMF’s study, the situation could worsen.
“Extremely cold conditions or insufficient gas demand compression this fall may necessitate energy restriction in Germany this winter,” the research stated. This might have “dramatic impacts on industry, impacting severely on the economic prospects for the euro area, and the possibility of negative cross-border spillover effects.”
The International Monetary Fund has also lowered its growth projections for China for this year and 2023 as strong COVID restrictions and a property market crisis contribute to a slowdown in the world’s second-largest economy.
The IMF stated in its quarterly global prediction that China’s gross domestic product is anticipated to increase by 3.2% this year, down 0.1 percentage point from its previous estimate in July. According to figures from the government and the World Bank, this would be the nation’s slowest growth in about four decades, excluding the first year of the pandemic.
The IMF predicted that growth would increase to 4.4% in 2023, a decrease of 0.2 percentage points from its prior forecast. Both statistics are well below Beijing’s stated GDP growth target of approximately 5.5% for this year, which many analysts feel is now impossible.
China’s economy grew by 8.1% in 2022, albeit from a weaker starting point due to the impact of viral lockdowns in 2020. But the world’s most populous nation has steadfastly adhered to a policy of eliminating new epidemics as they develop, in contrast to many nations that have reopened as the threat to public health from the virus has diminished. The zero-COVID approach, characterized by sudden lockdowns, mass testing, and lengthy quarantines, “had a toll on the economy, particularly in the second quarter of 2022,” according to the IMF’s World Economic Outlook report.
The Washington institution noted that a crisis in the “rapidly declining” real estate industry, which accounts for roughly a quarter of yearly GDP, “would impact hard on global trade and activity.” It cautioned that “a deepening of China’s property sector problem might spill over into the domestic banking sector and weigh hard on the country’s growth,” with potentially global repercussions.
China’s economic downturn comes at a time when the global economy is being pummeled by rising interest rates intended to combat skyrocketing prices caused by Russia’s war in Ukraine and global supply chain bottlenecks. Beijing has attempted to cushion poor growth in recent months by implementing a variety of support measures, including cutting key interest rates and injecting funds into banks. Nonetheless, according to observers, the effects do nothing to ameliorate the effects of the stringent lockdowns.
This month, China will reveal its third-quarter growth rate and a host of other economic statistics. In the three months leading up to June, the economy grew by only 0.4%, its lowest rate since the beginning of the pandemic.