A downgrade of the Chinese economy is the biggest change to the global economic outlook since October, said Gita Gopinath, the No. 2 official at the International Monetary Fund on Tuesday.
The outlook in China has “darkened noticeably,” Gopinath said, during a moderated discussion hosted by the Wall Street Journal CEO Council.
As expected, there is weakness in China from ongoing zero-COVID lockdowns and the troubled property sector.
What wasn’t expected is that private consumption has weaked and there is less mobility than expected, Gopinath said. There is a also shrinking workforce and a decline in productivity,
Reopening its economy after the pandemic is a big challenge for China, as a very quick opening up could overwhelm the country’s health-care system, she said.
“The movement has to be towards getting far more vaccination rates, increasing health care capacity, and then having a safe exit,” Gopinath said.
The IMF’s medium-term forecast was trimmed to 4.6% in October from 6% “and in January, we will be going lower,” Gopinath said.
Overall, the global economy in 2023 “will be worse” than this year, Gopinath said.
In October, the IMF forecast global growth to slow from 6% in 2021 to 3.2% in 2022 and 2.7% in 2023.
The IMF will publish an updated forecast next month.
“Going into 2023, we have a broad based slowdown in the global economy,” Gopinath said.
The U.S. economy should grow on average of 1% in 2023 and the possibility of avoiding a recession “is really narrow,”
The U.S. unemployment rate should rise above 5% by 2024 from 3.7% now. That usually means a recession, she said.
In Europe, about half of the countries that use the euro will be in contraction this winter, Gopinath said.
“So, there will be a significant slowdown” in the region, she said.
The risk remains that global central banks tighten monetary policy too little to fight inflation and this risk is higher than the chances of overtightening, she said.
The coming months could see a lot of twists and turns in financial markets, Gopinath said.
“We expect to see volatility coming from many different channels in markets,” she said.
For instance, there will be “false starts” about when the Fed might pause its interest rate rises and reverse course.
On both the outlook for the inflation in the U.S. and China’s reopening, Gopinath said markets are acting like children on a long car ride, repeatedly asking “are we there yet?”
On the Fed, “it is really premature to think about an interest-rate cut,” she said. The more relevant question is how long the Fed keeps interest rates high.
On China, markets seem to react positively to the slightest hint that China is opening up at a faster pace.
“I think we are going to see ups and downs on that,” she said.