Economic crisis: Seven risks that could lead to the worst case scenario”

The global economy is caught in a storm of shocks and uncertainties, as it still tries to recover from the health crisis. This Tuesday, July 26, in its new forecasts, the International Monetary Fund (IMF) revised downwards its growth forecasts and alert on the risks in sight. In particular, he draws up seven “particularly worrying” ones , the realization of which could lead to a “worst-case scenario” : one of the most serious economic crises in five decades.

The energy crisis

First of the risks, according to the IMF, the war in Ukraine and the repercussions of Western sanctions. There is “a lot of uncertainty” around the levels of Russian gas delivery to Europe for 2022 and 2023, supports the international agency in particular, indicating that a 40% drop has already been observed since April compared to the last year. The EU-27 also hope to further reduce their deliveries of Russian gas in the coming months.

In the event of a complete cessation of Russian exports, European countries will find themselves forced to implement energy rationing, affecting major industrial sectors, warns the IMF. Such a scenario would “significantly” reduce growth in the euro zone in 2022 and 2023, with a “cross-border” echo, further supports the international organization.

The persistence of inflation

In the process, inflation worries. While it is “generally expected” that this rate will return to pre-pandemic levels by the end of 2024, additional supply disruptions could cause this price hike, so feared by consumers, to become entrenched, continues the IMF. Sufficiently large shocks would moreover risk creating a situation of stagflation , where the recession would be accompanied by high inflation.

Bad policies

On the other hand, the IMF is concerned that central banks, in their attempts to counter inflation, have too heavy a hand. By not choosing the right gauge for key rates, central banks would expose their economies to an excessive drop in demand. “The risk of recession is particularly high in 2023,” analyzes the report.

The debt of emerging economies

With interest rates rising in advanced economies, borrowing costs will be higher across the world, and there is a risk that national currencies will depreciate significantly against the dollar. Among the first affected, the European currency fell to the dollar on July 12, a first for 20 years, automatically increasing the price of imports for part of the Twenty-Seven.

Such a risk of depreciation would occur, moreover, at a time when the financial position of many States is already “tense” , according to the IMF. The institution estimates that 60% of the countries among those with low incomes are at risk of finding themselves, or are already, in difficulty for their debt. Ten years ago, the figure was around 20%.

The threat of Covid in China

The situation in China is also being closely scrutinized by the international agency. And for good reason, the first half of 2022 was marked by numerous anti-Covid restriction measures which seriously disrupted activity in the country, and by extension, global activity. A new epidemic outbreak, accompanied by the Chinese government’s zero-Covid policy, could cause the country’s economic slowdown to stall, leading to “significant repercussions on a global scale”, according to the IMF, which also mentions a risk linked to the crisis in the Chinese real estate sector.

Social instability

And who says inflation, says discontent. This price increase “represents a threat not only to economic stability, but also to social stability”, underlines the IMF. A poor harvest or additional barriers to trade “could cause more suffering, famine, or civil unrest” .

Fragmentation of the global economy

With the war in Ukraine and the tensions between the West and Moscow, the IMF warns of a “serious risk for the medium-term outlook”. The international organization fears a fragmentation of the world economy into geopolitical blocs with flagrant differences in technological standards, international payment systems, and currency reserves.