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  • The coming recession will be even more damaging than expected, IMF managing director Kristalina Georgieva said.
  • Households’ real income will drop as rising prices and weak wage growth rattle their finances.
  • The world will lose $4 trillion — the size of Germany’s economy — in output by 2026, she said.

The world is hurtling toward an economic slump, and the decline is set to do more damage than previously anticipated, Kristalina Georgieva, managing director at the International Monetary Fund, said Thursday.

The economy is in the midst of a “fundamental shift,” and there will be growing pains, Georgieva said in a speech at Georgetown University. High inflation has eroded household finances the world over, and central banks around the globe are rushing to raise interest rates and cool the price surge. That widespread tightening threatens to slow global growth to a standstill.

The IMF’s latest forecasts saw the world economy growing 3.2% in 2022 and 2.9% next year. Yet the “darkening global outlook” has prompted the organization to downgrade next year’s growth estimate in an updated report due for release next week, the managing director said. 

The global economy is transforming into one with “greater uncertainty, higher economic volatility, geopolitical confrontations, and more frequent and devastating natural disasters — a world in which any country can be thrown off course more easily and more often,” she added.

On a macro level, the slowdown will equate to a roughly $4 trillion loss in global economic output over the next four years, according to Georgieva. That’s the same size as the entire German economy. One-third of the world economy will experience back-to-back quarters of economic contraction either this year or in 2023, and even in countries where growth remains positive, it will still “feel like a recession,” Georgieva said.

At the household level, the impacts will be stark. Real incomes — earnings adjusted for inflation — will shrink as prices continue to climb and wage growth slows down. Financial stability risks are also on the rise, meaning households’ investment balances are likely to whipsaw as uncertainties cloud the market’s path forward.

A global recession would also weigh heavily on labor markets. Hiring broadly rebounded at a strong pace through 2021 and 2022 as vaccines rolled out and economies reopened. Yet rising interest rates are poised to weaken demand, which in turn will lead to lower revenues for companies. Firms will likely choose to cut costs by trimming headcounts, a trend which could drive millions into unemployment.

The Federal Reserve’s own projections see the US unemployment rate climbing to 4.4% in 2023. If correct, that would translate to about 1.5 million more Americans unemployed compared to earlier this summer.

Still, the bleak forecasts shouldn’t keep central banks from raising rates, Georgieva said. The hiking cycle will have some fallout, but letting inflation stay high would be much worse, she added.

“This is not easy, and it will not be without pain in the near term. But the key is to avoid much greater and longer-lasting pain for everybody,” the managing director said.

Targeted stimulus for low-income households is also necessary to protect the most vulnerable, Georgieva said. Aid against high energy prices could cushion some of the blow, but officials should avoid “indiscriminate” spending that would risk even higher inflation, she added.

The slow descent into recession will rock economies and likely displace millions from the global labor market. But as that damage emerges, policymakers can still act to mitigate some of the damage and set households up for a healthy recovery once the storm has passed, Georgieva said.

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