Russia-Ukraine war taking ‘incredible toll’ on European economies: IMF economist

IMF Chief Economist Pierre-Olivier Gourinchas joins Yahoo Finance Live to discuss the IMF's downgrade on the global economy, inflation, central bank policy, and how Russia's invasion of Ukraine has upended markets.

Video Transcript

- Well, the IMF has downgraded its global economic growth outlook to 2.7% next year, with growth in the US seen at just 1% in 2023. The fund's new global outlook sees more than a third of the world economy contracting this coming year, with the European Union and China also continuing to stall. On inflation the fund sees price rises peaking late this year, but remaining at elevated levels.

Joining us to discuss the report is Pierre-Olivier Gourinchas, the IMF's chief economist. We've also got Yahoo Finance's Jen Schonberger joining in on the conversation. Pierre, it's good to talk to you today. I'm thinking about these so-called stormy waters you've described in the report, whether it's the Russian invasion of Ukraine, the cost of living crisis, what's happening in China. These have all been headwinds that you've been watching throughout the year. To what extent have they accelerated in the second half of the year that leads you to this downgrade?

PIERRE-OLIVIER GOURINCHAS: Well, it's certainly the case that some of the risks that we had flagged in earlier projection rounds, in particular in July, but even if you go back to April, have started to materialize. I mean, the energy crisis that results from the Russian invasion of Ukraine is perhaps the clearest one, where we see this incredible toll that's taking on European economies right now and also the fight against inflation that is proving quite challenging. Inflation keeps going up still. I mean, we're expecting that it's going to peak soon and then start going down as a result in part of actions by central banks.

But it's proven both more persistent, more elevated, and also broader. It's not just energy prices that are going up. It's what we call core inflation that excludes energy and food prices is also pushing upwards. And so that's something that complicates the task for central banks around the world.

The final factor in our forecast is, of course, the slowdown in China. Maybe there is a little bit less of a downward revision there. I mean, that's something that we saw a sharp slowdown in the second quarter of the year. And going forward, zero-COVID policy certainly leading to some localized lockdowns and confinements are affecting activity. And the weakness in the property sector is also another factor.

JENNIGER SCHONBERGER: Pierre, Jennifer Schonberger here. It's great to see you. It seems like the global economy is really being stretched here, perhaps on a string. You mentioned that a third of the countries will contract in growth this year or next.

We've got the war in Ukraine. We've got interest rates going up globally. You mentioned the slowdown in China. We just saw the services sector contract in September for the first time in four months. So it just seems that it's not going to take much to push it over the edge. What do you see as the odds of the global economy tipping into recession next year?

PIERRE-OLIVIER GOURINCHAS: Well, we certainly flag a number of downside risks in our report. Some of them you mentioned. I mean, the fight against inflation could prove more difficult than we expect at this point. We could have more energy price shocks. Markets could certainly experience a lot of stress. And associated with that in parts of the world the strength of the dollar is an important factor.

So we try to put all of this in an assessment of the risks around our baseline. And what we found out is that there is about a 25% probability that growth in 2023, global growth could be at about 2%. And 2% is a very low number. We only had that about five times since 1970. And every time we had this, if you look, it's 1973 the oil price shock, 1981 and the Volcker disinflation, the 2008 financial crisis. All of them are-- they are stuck in our collective memory as times of difficulties.

And there's a 10% to 15% chance that actually output growth could be even lower than 1%. Now, 1% is an interesting marker because this is at the level at which global output would remain stagnant per capita. And so that would be an economy that is not growing at all globally.

- Pierre, you mentioned the strength of the dollar, a big concern, something we've been watching. I mean, what we're seeing are major economy currencies here, whether that is the yen, the euro, the sterling, see huge swings on the back of the dollar strength. But it's the EMs that get hit even harder, given the dollar-denominated debt. How are you looking at that risk being elevated even further, given that it doesn't look like the dollar is going to pull back anytime soon?

PIERRE-OLIVIER GOURINCHAS: Yes, there's been a lot of strength in the dollar. Actually, what's interesting there also to point out is the strength of the dollar has been particularly important against other advanced economies, so the Japanese yen or the euro or the sterling, so more so than against many emerging market economies. In fact, even some emerging market economies-- if you look at Brazil or Mexico or Peru, their currencies appreciated against the US dollar. So it's more against advanced economies and emerging market economies.

But in part this is also because appreciation of the dollar is very painful in emerging market economies. So a number of them had already started tightening monetary policy, raising their policy rates, adjusting course, if you want, for their own economies, and found themselves in a different position compared to, say, the European Central Bank or the Bank of Japan or the Bank of England.

But this stress coming from the dollar are really important. They play out through multiple channels. They increase inflation in the rest of the world because a lot of goods are invoiced in dollars. And they also increase financial stress because countries or corporations that have debt in dollars find that it becomes harder to service them.

Now, if you want to think about how countries should address that, our recommendation at this point is that these movements in the dollar are really reflecting fundamental forces that are at play-- the fight against inflation, the energy crisis. And so countries should try to let the exchange rate adjust and accommodate because it reflects a sort of underlying change in the economy.

- Pierre-Olivier Gourinchas, the IMF's chief economist, I really appreciate your time tonight. And our thanks to Yahoo Finance's Jen Schonberger as well.