Category: Economics · Originally published on Predifi
Key Points
- IMF's severe scenario projects global GDP growth at 2%
- Prolonged closure of Strait of Hormuz could cause lasting damage
- High oil prices and global inflation expected under severe scenario
- Advanced and emerging economies face markedly weaker output
- Watch for Strait of Hormuz developments and oil price movements
The International Monetary Fund (IMF) has cast a dark shadow over the global economy, projecting a perilous drop in global GDP growth to about 2% if energy and trade disruptions persist into next year. This severe scenario, presented alongside the Spring Meetings, envisions a world teetering on the brink of recession, with the Strait of Hormuz—a critical chokepoint for global oil trade—under prolonged closure or heavy disruption.
The stakes are alarmingly high. In this severe scenario, sustained high oil prices would exacerbate global inflation, leading to markedly weaker output in both advanced and emerging economies. The IMF has starkly warned that there is 'no really good scenario' left, even if geopolitical tensions among the United States, Iran, the United Arab Emirates, Saudi Arabia, and Israel were to resolve rapidly.
In its latest risk assessment, the IMF modeled three war-related scenarios, with the most severe projecting global GDP growth to plummet to approximately 2%. This severe scenario assumes prolonged disruptions to energy markets and shipping, particularly the closure or heavy disruption of the Strait of Hormuz.
Under this scenario, the IMF anticipates sustained high oil prices, which would feed into global inflation. Consequently, both advanced and emerging economies would experience markedly weaker output. IMF officials have emphasized that even an unexpectedly rapid resolution of geopolitical tensions would still leave 'lasting damage' to the global economy from recent events.
The root cause of this severe scenario is the escalation of geopolitical conflicts leading to energy and trade disruptions. The causal chain begins with these conflicts causing immediate disruptions in energy markets and trade routes. This leads to the IMF's severe scenario, where global GDP growth drops to about 2%.
The second-order effect is prolonged high oil prices and global inflation, which in turn results in weaker output in both advanced and emerging economies. The third-order effect could be long-term structural changes in global trade routes and energy dependencies. This scenario echoes the 1973 Oil Crisis, which resulted in a global recession that took several years to resolve. The underpriced risk here is the potential for long-term structural changes in global trade and energy markets.
The immediate market reaction to this severe scenario would likely begin in energy futures and commodities markets, where high oil prices would drive significant volatility. Inflation-sensitive assets like bonds and stocks would follow, with investors recalibrating their expectations for global economic growth and inflation.
Currencies of oil-importing nations would weaken as the cost of imports rises, leading to broader cross-asset spillover effects. For instance, the Euro and Japanese Yen could depreciate against the US Dollar, affecting forex markets. Prediction markets would see a repricing of recession odds, with a higher probability assigned to a global recession occurring within the next year.
The most critical data to watch will be developments around the Strait of Hormuz and global oil price movements. Any signs of prolonged closure or heavy disruption would further heighten global recession risk. Additionally, keep an eye on inflation data from major economies, as sustained high inflation could signal a deepening economic downturn. The single most important question remaining is whether geopolitical tensions will escalate further, leading to more severe and prolonged disruptions.
Prediction markets are likely to see a significant shift in probabilities for rate hikes, recession odds, and unemployment forecasts. The probability of a global recession within the next year could rise by 20-30%, driven by the IMF's severe scenario and the potential for prolonged energy and trade disruptions.
This article was originally published at predifi.com/blog/imf-severe-scenario-global-recession-risk-2023. Predifi is an on-chain prediction market aggregator built on Hedera. Join the waitlist →
