Financial tightening could send global economy into recession in 2023: IMF

By Ovunc Kutlu

ANKARA (AA) - Sharp tightening of financial conditions amid high inflation could send the global economy into recession in 2023, the International Monetary Fund (IMF) said in a report on Tuesday.

Recession fears have grown in the middle of this year as central banks around the world have strongly shown their resolve to fight record-high inflation, said the IMF's Global Financial Stability Report.

It noted that every time the US Federal Reserve had raised the federal funds rate close to, or above, measures of the neutral nominal rate, the American economy entered a recession soon thereafter, except for the tightening cycle in 1994 when inflation was not excessively high around that period.

"The global environment is fragile with storm clouds on the horizon. Inflation is now at multi-decade highs and broadly spread across countries. The economic outlook continues to deteriorate in many countries. At the same time, geopolitical risks persist," said the report, titled Navigating the High-Inflation Environment.

"Asset prices have sold off on the back of growing recession fears amid natural gas shortages and the reemergence of fragmentation risks in the euro area," it added.

The IMF said emerging markets are facing various risks stemming from the strengthening of the US dollar, rising external borrowing costs, high inflation, volatile commodity markets, heightened uncertainty about the global economic outlook, and pressures from policy tightening in advanced economies.

In the private sector, large firms saw a contraction in profit margins due to higher costs, while small firms have been experiencing bankruptcies since they are more affected by rising borrowing costs, according to the IMF.

The organization warned that central banks' aggressive monetary tightening policies, which lead to rising borrowing costs and tighter lending standards, could adversely affect housing markets.