IMF Chief Predicts A Recession For Developing Countries In 2023

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Key takeaways:

  • IMF Managing Director Kristalina Georgieva is predicting that one-third of the world’s economies will slip into recession in 2023, with the biggest impacts being felt in emerging and developing economies.
  • Russia’s war on Ukraine and China’s abruptly changing COVID-19 policies are both playing large roles in this outlook.
  • The American economy is tenuous but could avoid a recession if it maintains its strong labor market. Its success is a double-edged sword for emerging economies, though.

A grim outlook arose for the new year when Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF), revealed predictions for the 2023 global economy in an interview with the CBS show Face the Nation.

The interview revealed that three of the world’s largest economies – the EU, the U.S. and China – are all slowing simultaneously. Georgieva pointed out that as bad as that looks for the three governances, it’s even worse for emerging and developing economies across the globe. She says that one-third of the world economy will be in recession in 2023.

Ultimately, this assessment hinges on three things that have been central to all economic stories over the past few years: the pandemic, geopolitical conflict and the U.S. labor market. While the former two aren’t likely to go away anytime soon, the big question mark that could make or break economies across the world is America’s employment sector.

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Russia’s war on Ukraine could push half of EU into a recession

Georgieva has singled out Russia’s invasion of Ukraine as the largest negative contributor to the world economy in 2023. The Russian economy isn’t one of the largest in the world. Neither is Ukraine’s. But the EU’s sure is.

In reaction to the invasion of Ukraine, the EU and many of its European neighbors put sanctions on Russian individuals and imports, most notably Russian oil.

While Georgieva thinks that over the long-term the energy independence the EU is building to separate itself from Russian imports will be a net win for the region, in the short-term, she predicts that half of Europe will be in a recession in 2023.

In recent days, President Erdoğan of Turkey has been putting pressure on Moscow to commence a ceasefire and peace talks with Ukraine. The two countries are frenemies. They economically rely on each other in certain ways but have been on opposing sides of certain conflicts like Syria. Turkey has also served as a visa-free safe haven for Russian men fleeing Putin’s draft.

Putin has agreed to engage, but only if Ukraine accepts Russia’s seizure of Ukraine’s own sovereign lands. This is unlikely to actually result in peace, meaning that the conflict is likely to be ongoing.

China’s new COVID-19 policies will slow its economy

Prior to the pandemic, China contributed 35-40% of overall global growth with just 18% of the world’s population. The past few years have been a bumpy ride, though.

In 2018, GDP growth was at 6.8%. It grew at a slower rate of 6.0% in 2019, and plunged to just 2.2% growth in 2020 with the onset of the pandemic (or at least recognition of the pandemic).

In 2021, the rate rose to an incredible 8%, a rate it hadn’t seen since prior to 2012. But in 2022, it was back down again to 3.2% GDP growth.

Georgieva is predicting a type of whiplash from dramatically changing COVID policies going into 2023. Where China has been one of the most careful nations with zero-COVID policies over the past two and a half years, it recently went the opposite direction very quickly.

Even as the people were allowed more free movement, the infection of a largely unexposed populace has led to business closures as people are staying home either out of illness or prudence. In December, the Chinese economy moved to its slowest pace since February 2020.

Georgieva is anticipating even more of these COVID-19 “bushfires” over the next three to six months as the virus spreads and mutates. The mass death and disability that may follow, along with people’s behaviors as they navigate areas of high exposure, may lead to further economic deceleration.

The U.S. labor market is a double-edged sword

The U.S. economy is slowing too, but Georgieva points to the U.S. labor market as a beacon of hope. The U.S. is generally seen to be the world’s most stable economy, and if it can avoid a recession, this may provide some stabilization to the rest of the globe.

The thing propping up the U.S. market is its jobs numbers. Despite layoffs in the tech sector, there are 1.7 jobs open for every unemployed American. If unemployment stays low and wages continue to grow, we could avoid more economic turmoil and help other countries along the way.

But inflation is high, so the Fed is raising rates to combat it. A well-known potential consequence of raising rates at this moment is sparking a recession, in which companies are likely to tighten their purse strings at the expense of their employees. We could see either wage stagnation or mass layoffs across more than one employment sector.

Another problem is that rising interest rates disproportionately hurt emerging and developing economies.

How rising rates disproportionately hurt developing economies

In times of inflation and general economic uncertainty, investors typically choose to invest in the American economy. The most common investment in moments like these are government bonds, which tend to look more attractive as the Fed raises rates.

All of this activity pushes up the value of the U.S. dollar, which is great if you’re an American looking to vacation abroad. But it’s horrible if you’re a developing nation. A rise in the U.S. dollar means an effective decrease in your own currency’s value.

Many of these countries owe debt. They tend to owe this debt in stronger, foreign currencies. When the value of a stronger currency like the U.S. dollar goes up, other nations have to earn more of their own currency to meet their debt obligations. They were already at a disadvantage, but the decrease in their own currency’s value puts them further behind.

The bottom line

Georgieva is warning that 2023 will hurt more than 2022. The global economy is not poised for a good year. What happens in the world’s largest economies will have an outsized effect on the smaller ones, so whatever suffering we endure here in the U.S. (or China or the EU) will be magnified across the globe.

However, there is an old adage in investing that’s often attributed to Warren Buffet: “Be fearful when others are greedy, and greedy when others are fearful.” If you’re investing for the long-term, and are making sensible investment choices, times of economic downturn can be a good time to invest your money to take advantage of future growth.

In times of such turbulence, it can be difficult to get a pulse on which investments are smart ones and which ones you should drop. Luckily, you can leverage the power of AI to make those decisions for you. Our Investment Kits make investing less of a research project, and you can even opt into Portfolio Protection for further peace of mind.

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