The heads of the International Monetary Fund and World Bank warned of a rising risk of global recession as advanced economies slow and faster inflation forces the Federal Reserve to keep raising interest rates, adding to the debt pressures on developing nations.
In the U.S., the world’s largest economy, the labor market is still very strong but is losing momentum because the impact of higher borrowing costs is “starting to bite,” IMF Managing Director Kristalina Georgieva said on Monday. The euro zone is slowing as natural gas prices soar, and China due to COVID-19 disruptions and volatility in the housing sector.
The IMF calculates that about one-third of the world economy will have at least two consecutive quarters of contraction this year and next, and that the lost output through 2026 will be $4 trillion.
At the same time, policymakers can’t let inflation be a “runaway train,” Georgieva said at a virtual event kicking off the IMF and World Bank’s annual meetings. “If you don’t do enough, we are in trouble.”
She added that fiscal support should be well-targeted so that it doesn’t fuel inflation, and that the world needs to help emerging and developing economies hit particularly hard by tightening financial conditions.
World Bank President David Malpass, speaking alongside Georgieva, warned that there’s a “real danger” of a worldwide contraction next year. Dollar strength is weakening the currencies of developing nations, increasing their debt to “burdensome” levels, he said.
Sign up for the Fortune Features email list so you don’t miss our biggest features, exclusive interviews, and investigations.