The International Monetary Fund on Tuesday maintained its global growth forecast for this year at 3.2 percent, but lowered the outlook for next year to 2.7 percent, down 0.2 percentage point from its earlier projection, amid high inflation and monetary policy tightening.
Japan's growth projection for 2022 was left unchanged at 1.7 percent from the July projection and that for 2023 was downgraded by 0.1 point to 1.6 percent, with the IMF citing rising energy import prices and lower consumption as inflation outpaces wage growth.
With Russia's invasion of Ukraine continuing to affect the global economy, including through higher food and energy prices, and the coronavirus pandemic lingering, the IMF said in its World Economic Outlook report, "In short, the worst is yet to come, and for many people, 2023 will feel like a recession."
Countries accounting for about one-third of the global economy are poised to contract this year or next, while the United States, China and the euro area will continue to stall, the Washington-based institution said.
In the United States, where the Federal Reserve is aggressively raising interest rates to tamp down decades-high inflation, growth for this year is expected at 1.6 percent, down 0.7 point from the earlier estimate. The forecast for 2023 remained unchanged at 1.0 percent.
Inflation is reducing disposable income and consumer demand, while higher interest rates are taking a toll on spending, especially on residential investment, the report said.
The euro area, hit by a reduction of gas supplies from Russia amid the war on Ukraine, is expected to see its economy grow 3.1 percent in 2022 and 0.5 percent in 2023 -- an upward revision of 0.5 point and a downward revision of 0.7 point, respectively.
China has been overshadowed by continued lockdowns under its stringent "zero-COVID" policy and weakening property sector, leading the IMF to cut the growth forecast of the world's second largest economy by 0.1 point in 2022 and 0.2 point in 2023 to 3.2 percent and 4.4 percent, respectively.
Calling the increasing price pressures "the most immediate threat to current and future prosperity," the IMF predicted global inflation will peak at 9.5 percent in late 2022 but remain elevated for longer than previously expected, decreasing to 4.1 percent by 2024.
The IMF also highlighted that the sharp appreciation of the U.S. dollar against many other currencies, on the back of the Fed's interest rate hikes that began earlier this year, is causing "acute challenges" for many emerging markets as a result of tightened financial conditions and an increase in the cost of imported goods.
As the global economy is headed for "stormy waters," financial turmoil may well erupt, prompting investors to turn to safe-haven investments, such as U.S. Treasurys, and pushing the dollar even higher, the global lender warned.
Divergences in economic policies between the United States and countries such as Japan, which has maintained monetary easing, may continue to contribute to the dollar's strength, the IMF also said.
In 2022, the dollar has already appreciated by about 15 percent against the euro, over 10 percent against the Chinese yuan and 25 percent against the yen, according to the report.
The Japanese currency's recent slump has become a headache for resource-poor Japan as it inflates import costs for raw materials, including crude oil, although it also boosts the overseas profits of Japanese exporters in yen terms.
In September, Japanese authorities intervened in the foreign exchange market by buying the yen, the first such intervention in 24 years.
According to the IMF report, global trade growth is slowing sharply from 10.1 percent in 2021 -- when the world economy grew 6.0 percent amid a recovery from the downturn caused by the coronavirus pandemic -- to a projected 4.3 percent in 2022 and 2.5 percent in 2023.
The slowdown can be partly attributed by the dollar's appreciation, given the currency's dominant role in trade invoicing, the IMF said.