IMF warns of recession

Investment Analysis Clubs Macro Economic Trends and Risks
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I.M.F. Warns ‘Worst Is Yet to Come’ for World Economy

The International Monetary Fund lowered its growth outlook for 2023 and suggested interest rate increases could spur a harsh global recession.
By Alan Rappeport, The New York Times, Oct. 11, 2022

…The I.M.F. maintained its most recent forecast that the global economy would grow by 3.2 percent this year but now projects that will slow to 2.7 percent in 2023, slightly lower than its previous estimate. But at the start of the year, the I.M.F. projected much stronger global growth of 4.4 percent in 2022 and 3.8 percent in 2023, highlighting how the outlook has darkened in recent months.

As the pain piles up in rich and poor countries alike, policymakers are under increasing pressure to blunt the fallout, with central bankers — including the Federal Reserve — facing calls to curtail interest rate increases.

Still, the I.M.F. warned that doing too little to combat inflation would make the fight more costly later. It also said that governments should avoid enacting fiscal policies that will make inflation worse…[end quote]

Here is the IMF report.

Global inflation is forecast to rise from 4.7 percent in 2021 to 8.8 percent in 2022 but to decline to 6.5 percent in 2023 and to 4.1 percent by 2024. Monetary policy should stay the course to restore price stability, and fiscal policy should aim to alleviate the cost-of-living pressures while maintaining a sufficiently tight stance aligned with monetary policy. [end quote]

The IMF is talking out of both sides of its mouth here.

When it says, " fiscal policy should aim to alleviate the cost-of-living pressures " it means that governments should spend more to give money to people who are suffering from rising prices. But inflation is caused by demand that is rising faster than supply. So giving “helicopter money” without raising productivity is guaranteed to increase inflation. As it did with the Covid fiscal stimulus in the U.S. in 2021.

The IMF is advising the monetary and fiscal powers to work at cross-purposes.

Monetary policies mainly affect banks and impact asset prices (stocks, bonds, real estate). The effect of monetary policy on consumer price inflation is slow and indirect. Raising interest rates can cause a recession without necessarily reducing consumer price inflation (stagflation).

Fiscal policy directly impacts consumer price inflation by putting money into consumer hands. Consumer prices will rise if demand rises without equal supply rises (goods and services).

It doesn’t help the situation that the IMF is paying lip service for monetary and fiscal policy to “stay aligned with each other” while at the same time advising them to work against each other.

Wendy

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That is not what that necessarily means.

It is well studied for many decades now that higher corporate and top income bracket taxes reduces inflation going forward. That is demand side economics.

It is also spending that money on infrastructure that enables supply. That is demand side economics. The efficiencies of a better infrastructure bring down costs to consumers. Furthering demand with better infrastructure creates economies of scale longer term. Again demand side economics.

Policies of tax cuts induce greater inflation. Supply side economics. Such a give away does not show up in production capacity numbers in the US. It shows up as deficit spending for the federal government for four decades now. A transfer from the public coffer to the wealthy for nothing done, nothing accomplished. Then the lie begins ‘cut welfare’, there is not much left to cut for two decades now unless we cut seniors off from their needs.

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Wendy,

The “helicopter money” was between 2009 and 2011 primarily and 2020 and 2021 for Covid. The only year that was not really supply side econ based was 2021. That was giving poor people money. Particularly very impoverished bankers who have been rolling in the dough ever since.

The greatest reason for our current inflation has been the tax cuts of 2017. Covid demanded infusions of money to get a dead economy back to life. The tax cuts never increased production in the US. But when Covid hit the tax cuts caused mayhem in the cost of goods and services.

Coming into 2022 as we left supply side economy behind we got a glimpse of America rebuilding her industrial might. After we were done with supply side economics.

Yes the government has relieved some student debt. In effect our generation has far less student debt because the government picked up much more of the bill at the state schools in those days. We forget how society helped us and begrudge others.

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