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Downside Risks to Global Growth

In keeping with the perma-optimism deeply embedded in financial markets, the latest World Economic Outlook calls for a perfect soft landing in the $96 trillion global economy. There are at least three large reasons to be skeptical.

NEW HAVEN – The predictable downward revision cycle for the global economic outlook has officially begun. That’s the message from the semi-annual World Economic Outlook just released by the International Monetary Fund, which reinforces earlier revisions from several prominent private forecasting teams.

The revision, largely in response to the war in Ukraine, is a big one – a sharp reduction in world economic growth to 3.6% for 2022, fully 1.3 percentage points below the IMF’s global growth forecast of 4.9% made just six months earlier. To its credit, the IMF warned that this was coming, with an interim downward revision of 0.5 percentage point previously released in January. Even so, in looking back over the past 15 years, this is the third-largest cut in the IMF’s regular six-month revision cycle.

In April 2009, as the global financial crisis (GFC) was unfolding, the IMF cut its global growth estimate for the year by 4.3 percentage points (taking its pre-crisis projection of 3% positive growth down to an outright contraction of -1.3%). And, of course, as the COVID-19 pandemic erupted in early 2020, the IMF slashed its growth estimate for the year by 6.4 percentage points (from a pre-pandemic projection of +3.4% to an outright contraction of -3%). In both of those earlier cases, the outsize forecast reductions foretold sharp global recessions – in fact, the two worst recessions in modern history.

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