Bad economic news has become so common that it almost fades into the background. But the IMF’s October 2022 World Economic Outlook gave that general sense of malaise a much sharper form: global growth is weakening broadly, and the slowdown is not confined to one region or one temporary shock.
The IMF’s warning was already stark
In that report, the IMF cut growth forecasts for most major economies in 2022 and remained pessimistic about 2023. Those projections were made under existing external conditions. If the war in Ukraine worsens, if energy prices rise further, if the pandemic disrupts activity again, if extreme climate events intensify, or if food supply conditions deteriorate, then the real outcome could be worse than the baseline.
And once contraction deepens, the damage does not remain economic for long. Political conflict rises, trade fragmentation hardens, energy and resource prices stay elevated, food supply becomes more strained, and the whole system can enter a worsening spiral.
The IMF put it bluntly in the preface to the report: global growth was expected to remain at 3.2% in 2022, then slow to 2.7% in 2023, which was 0.2 percentage points lower than its July forecast. It also said there was a 25% chance that global growth could fall below 2%. More than a third of the world economy would see contraction either this year or next, while the three largest economies—the United States, the European Union, and China—would remain effectively stalled. Its plain-language conclusion was even more striking: the worst is yet to come, and for many people 2023 will feel like a recession.
The IMF gave three main reasons for that judgment:
- Russia’s invasion of Ukraine
- persistent and broadening inflation pressure, which has become a cost-of-living crisis
- slowing growth in China
Those reasons are real, but not complete
Those three factors are valid. But they leave out what may be the most important force shaping the current downturn: American stagflation pressures and the global impact of U.S. monetary tightening.
This is the kind of point that can easily be dismissed as bias or conspiracy-minded thinking, so it is worth stating carefully. Institutions like the IMF and World Bank were built under U.S. leadership, are headquartered in the United States, and have long been closely linked to American policy and elite networks. That does not make their analysis false. But it does mean that events are often framed from a perspective that is relatively sympathetic to the United States. Two interpretations can both be factual and still reflect different underlying priorities.
Take the IMF’s third reason: slowing Chinese growth. That is true. But one important reason for China’s slowdown is weaker demand in the United States, Europe, and elsewhere. And one important reason global purchasing power has weakened—alongside the effects of the pandemic—is the Fed’s tightening cycle.
The United States is still the leading power in the global economic system and remains the main architect and guardian of the existing order. That position is not disappearing anytime soon. As a result, the Federal Reserve’s monetary policy is not merely a domestic issue. Finance ministers and central bankers across most of the world spend a great deal of time watching what the Fed says and trying to anticipate what it will do.
Inflation in the United States remains serious, and there has been no convincing sign of a clean reversal. That means tight monetary policy is likely to continue. Once the Fed tightens, the effect spreads far beyond U.S. borders, especially to countries whose economies and currencies are deeply connected to the dollar system.
For the United States itself, the choice is toxic either way. If it does not tighten, inflation can become worse, pushing up wages, energy costs, commodity prices, real estate bubbles, and financial asset bubbles, storing up even bigger risks for the future. But if it does tighten, it will predictably slow growth, increase unemployment, and raise the burden on public welfare systems. In other words, tightening is also a kind of poison. Washington has simply judged it to be less dangerous than allowing inflation to run unchecked.
The problem is that countries highly exposed to the U.S. economy do not necessarily need the same medicine. Their economic structures, development stages, debt burdens, and tax systems are different. Some may be better served by looser policy. But the reach of U.S. power forces many of them to move in the same direction anyway, as if they have been tied to the same chariot.
So while U.S. tightening may be a rational decision from the standpoint of American interests, its global effect has been contractionary in a very visible way. As long as that tightening continues, the world economy will keep feeling the pressure.
Forecasts often lean optimistic at turning points
There is another reason to be cautious about the IMF outlook: the IMF, like many central banks, tends to be somewhat optimistic in its economic assessments. In boom periods, institutions often underestimate how hot growth can run. In downturns, they often underestimate how bad contraction can become.
Over the three pandemic years, global institutions repeatedly failed to fully capture the depth of the squeeze. There is good reason to suspect 2023 would not be an exception. The actual outcome could easily turn out worse than even the IMF’s stated downside risk—its estimate that there was a 25% chance of global growth falling below 2%.
The poorest countries may suffer most, but measurement there is weak
The countries likely to suffer most from a global contraction are probably not the richest ones in the headlines, but poorer countries in West Africa and parts of Asia. Yet the economic statistics in those places are often incomplete or unreliable even in normal times. Once crisis conditions hit, measuring the scale of damage becomes even harder. That makes the precision of any forecast questionable.
Europe may be under even more strain than the United States
News coverage often frames U.S. tightening mainly as a blow to American consumption, and then to American production. But at the moment, the region most exposed to the combined effect of monetary tightening and energy disruption may be Europe.
That is because many European economies are more manufacturing-oriented than the U.S. economy, which is more service-heavy. Manufacturing depends more directly on energy and raw materials. U.S. inflation has helped push global energy and commodity prices higher. The war in Ukraine reduced energy flows into Europe and drove natural gas prices up several-fold. When household energy costs surge, governments face immediate public pressure, so they prioritize consumer needs. That can leave industrial users short of energy, leading to production cuts or shutdowns. And once factories stop, the economic damage follows quickly.
The contrast with the United States is obvious. America is rich in resources and energy. Under tight monetary conditions, some U.S. mining and energy sectors can actually earn higher profits than they would in normal times.
That is why the countries at greatest risk in the current environment are often those with an “external on both ends” model: they depend on outside sources for raw materials and outside markets for finished goods. If they also rely heavily on imported energy, the shock becomes severe. This is one reason the United States has pushed sanctions and forms of decoupling so aggressively, while Germany has spoken clearly against decoupling.
The people hit hardest are usually those with the fewest assets
Macroeconomic damage is never spread evenly. For individuals, the burden of contraction varies sharply.
The group likely to suffer most is low-net-worth households—especially people who own no fixed assets beyond a home, and no meaningful financial assets at all. Economic contraction tends to bring more unemployment and lower real wages. For people without asset buffers, that can be devastating. Mortgage payments, car loans, and other debt become harder to carry. Existing living standards become impossible to maintain. The decline in quality of life can be sharp and humiliating.
And the full harm is often greater than what is visible on the surface.
One study by Dr. M. Harvey Brenner of Johns Hopkins University examined the effects of the severe 1974–1975 recession on life and health in the United States. His findings suggested that the recession raised the normal death rate by 2.3%, increased cardiovascular mortality by 2.8%, increased cirrhosis mortality by 1.4%, and pushed the suicide rate up by 1%. He also found a 6% rise in psychiatric hospitalization and a 6% increase in criminal behavior. Based on his estimates, the sudden surge in unemployment between 1974 and 1975 led to 45,900 deaths in the United States.
That research focused on the general U.S. population. If equivalent high-quality data existed for the extremely poor, the picture would likely be much worse. In a global downturn, hunger, disease, and basic material deprivation do not remain abstract statistics.
Economic cycles are real, even if neat theories are not
Looking across modern economic history, especially since industrialization, one pattern is hard to deny: expansion and contraction alternate. Many cycle theories were built on that observation—short ones like the 3–4 year Kitchin cycle, medium ones like the 8–10 year Juglar cycle, longer ones like the 15–25 year Kuznets cycle, and very long ones like the 50–60 year Kondratiev cycle.
I do not find those specific cycle theories especially convincing. The historical samples are limited, and the fit between theory and actual economic history is often awkward rather than exact. But rejecting those tidy formulas is not the same as rejecting cyclicality itself.
Economic cycles exist because over time the economic model, productive forces, and production relations stop fitting together smoothly. A cycle is, in effect, the process through which those relationships are rebalanced.
The current global economic order under U.S. leadership took shape in the 1970s and 1980s and then entered a long period of prosperity. More than thirty years have passed. The world economy has changed enormously, and adjustment has become unavoidable. But any serious adjustment means some reduction in U.S. dominance. Naturally, the United States resists that. China, Japan, and the European Union naturally seek greater influence. This is not fundamentally a matter of morality. It is a struggle over interests and the right to define the rules.
How U.S. dominance in the global economy was built
The roots of U.S. centrality go back far before the present moment.
During the Napoleonic Wars in the early nineteenth century, European powers were too occupied to fully control their American colonies, and the United States used that moment to complete major territorial expansion. In the first decade of the twentieth century, U.S. GDP surpassed Britain’s, making America the world’s largest economy. Yet global finance was still centered in London, held there partly by inertia.
World War I strengthened the U.S. position further and turned the United States into a major creditor to Europe. After the war, New York replaced London as the world’s financial center. Until the 1929 crisis, the U.S. continued collecting war debts from Europe, and those repayment burdens weighed heavily on European development. When crisis hit, Europe suffered deeply. Germany, as a defeated power, saw total economic collapse. Debts were eventually forgiven for the sake of European stability. But poor policy choices in the United States contributed to a prolonged and repeated European crisis, helping create the conditions that led to World War II.
During World War II, wartime economic controls greatly strengthened the U.S. federal government, while the American economy surged. At its peak, U.S. GDP accounted for 56% of the global total. After the war, America was once again Europe’s creditor.
To confront the socialist bloc, the U.S.-led NATO alliance was established after the war. To rapidly strengthen its allies, the United States provided major economic and technological assistance, and in the process steadily increased its say over the economic and political direction of recipient countries.
In 1944, the Bretton Woods system made the U.S. dollar the world’s central currency.
In 1971, after global recovery and repeated crises in the U.S. and Europe, President Nixon suspended that system—officially as a temporary move, in practice permanently. The dollar’s international standing came under pressure, and a rising Europe and Japan began seeking greater influence over the global economy.
To restrain those challengers, the United States led the 1985 Plaza Accord, which halted Japan’s expansion and helped produce what later came to be called its “lost decades.” Washington also long resisted deeper European unity, because a consolidated Europe did not fit well with a unipolar American order. Still, under the leadership of countries like France and Germany, the European Union was formally established in 1993.
In 1999, the euro—built around the German mark’s monetary legacy—was introduced, ending the era in which the dollar stood entirely alone. Since then, the broad structure has stabilized: the dollar remains first, the euro second.
China overtook Japan in GDP in 2010 and became the world’s second-largest economy. Since then, it has increasingly sought more voice in the international economic order, bringing it into friction with those who maintain the existing system.
If one wants to understand American influence in the world economy more concretely, a few indicators matter especially: the U.S. share of global GDP after World War II, the share of U.S. outward investment in major economies’ foreign capital inflows, the dollar’s share in global settlements and reserve holdings, and the dollar’s weight in the IMF’s Special Drawing Rights basket.
Global leadership rests on technology, finance, and culture
Economics and politics can never be cleanly separated. Throughout history, economic dominance and political dominance have tended to emerge together.
In the modern world, any country seeking global leadership must usually rely on three channels: technology, finance, and culture. Export any one of those to the world, and you shape the politics and economics of the countries that receive it.
At present, the United States holds overwhelming advantages in all three. That is the real basis of American hegemony.
If China is to challenge that position, the most likely path is finance, followed by technology, and finally culture.
After more than forty years of reform and opening, China has accumulated enormous wealth at both the national and private level—that is, capital. When capital is exported to countries that need it, helping them survive crisis or develop faster, influence follows naturally. That is one of the larger reasons behind the Belt and Road initiative. It is too narrow to view it only as a way to absorb surplus industrial capacity.
Technology is probably the second most promising area for Chinese external influence. One reason is that Chinese innovation has entered the front ranks globally. Another is cost advantage: the same technology can often be delivered more cheaply, especially in assistance-oriented projects.
Culture comes last not because Chinese civilization lacks depth, but almost because it has too much. The deeper and more complex a culture is, the harder it is to export. Both technology and culture spread more easily when they are simple. What becomes “universal” is not necessarily what is most correct, but often what is easiest to absorb.
Why the United States once favored openness and now favors selective closure
Does the global economy need openness? In principle, yes. That has been the dominant postwar consensus, and the United States itself was the chief architect of that open order.
So why has Washington in recent years pushed toward fragmentation, sanctions, and partial decoupling? This is often explained in the media as a campaign against rogue states, terrorism, or hostile ideologies. Those are American justifications that are then widely repeated. But the deeper logic is interest.
After World War II, the United States accounted for more than half of world GDP, and its manufacturing share was similarly enormous. Because wartime controls had restrained domestic income gains, the postwar U.S. economy faced huge productive surplus. To absorb that surplus, America had to turn outward to global markets. Free trade and integrated markets were not merely ideals; they were useful solutions to a concrete problem.
Capital also needed to move outward. If it did not, the domestic economy risked overheating, excessive investment, and inflation—problems that did indeed appear later. So both industrial output and capital sought global outlets, and the United States became the main champion of openness.
Today the situation is different. The European Union has already carved away a substantial part of U.S. influence, and China is trying to rise further. If China gains the voice it seeks, that influence must come from somewhere, and much of it would necessarily come at the expense of the United States and Europe. So Washington and, to a point, Europe both resist China’s ascent in order to defend their own position.
But this alignment is not stable. Interests are stable; alliances are not.
The EU is the swing factor. If containing China does not damage European interests, Europe will support it firmly. But if the result is that the United States gains much more while Europe bears significant costs, Europe may drag its feet or even reassess its alignment. In this kind of struggle there is no sentimentality. Today’s rival can become tomorrow’s partner.
China has already become the world’s largest producer of goods and one of the major exporters of capital. In that sense, it now resembles the postwar United States more than many people admit. That helps explain why China increasingly speaks in favor of openness, while the United States has become more selective and restrictive.
This recessionary phase is unlikely to end quickly
Will the downturn pass soon? Will a new boom arrive quickly? Probably not.
The IMF’s three reasons for weakness are real, but they are also somewhat superficial. That may simply reflect the habit of international institutions and politicians, who often speak cautiously and leave the deeper structure unstated.
The pandemic will pass, and likely within a relatively limited time horizon. The Russia-Ukraine war will also end at some point, likely sooner than a great civilizational conflict would. But the struggle over voice and power between a rising China and a U.S.-European order trying to contain that rise will not end quickly.
There are only two broad ways that conflict resolves. One is that containment fails and the existing powers accept a new global arrangement. The other is that China’s rise is halted and it repeats Japan’s trajectory. Neither outcome is likely to be settled in the short term.
That means global economic turbulence is also unlikely to fade quickly. The contraction may last longer than many currently hope.
What should people do in a downturn?
The logic of the state and the logic of the individual are often in conflict during recession.
Governments want households to spend more and consume more, because that helps restart growth. Individuals, facing uncertainty about how long the slump will last, usually do the opposite: they cut spending and increase savings. That divergence is one reason recoveries can be difficult.
Keynes argued that in such times government investment should rise, with the state spending in place of private actors. But Keynesian policy has never been flawless and can leave serious aftereffects. Today most governments speak more in the language of Friedman’s monetarism, though in practice policy is usually a hybrid of Keynes and Friedman.
Different countries achieve very different outcomes in managing recessions partly because their national conditions differ, and partly because their understanding and execution of these frameworks differ.
As for what any given country should do, there is no universal formula. What is right for the United States is not the same as what is right for China, and what is right for China is not the same as what is right for a country in West Africa. Policy imitation without regard to local reality is a bad habit.
For individuals, one basic divide matters more than many slogans do: people with assets and people without them. In both booms and slumps, asset owners usually find ways to preserve and eventually increase wealth. Low-net-worth households suffer far more in contraction.
For ordinary people, especially poorer households, the most practical response in recession is usually to reduce expenses as much as possible and avoid taking on debt unless absolutely necessary. Unless you are certain the downturn has already passed—or is about to pass—it is better to guard your cash carefully.
A few practical thoughts on preserving assets
There is no perfect formula here, and certainly no universal one. But some broad principles make sense, especially as uncertainty rises.
- People in middle-income and high-income countries generally do not need to hoard food or daily necessities. Those countries retain significant purchasing power. Even in a global food crisis, they are likely to secure supply; the main issue is price, not absolute availability. Food spending as a share of income is relatively low in rich countries, so even a sharp rise hurts less than it does in very poor countries, where food can account for around 40% of income. As for ordinary consumer goods, recessions usually create industrial surplus, not shortage, so prices are more likely to weaken than surge.
- Cut unnecessary spending and avoid debt where possible. Interest payments can further erode your ability to cope with crisis.
- Keep a larger share of highly liquid assets. Liquidity may sacrifice upside, but it provides stability. In a crisis, the central problem is uncertainty, not the failure to maximize speculative returns.
- Avoid high-risk companies. In recession they are more likely to fail.
- Real estate has to be judged case by case. Property is shaped by policy, demographics, social structure, and the structure of the wider economy, so there is no universal rule. In general, even if strong growth returns, the era of automatic 20% annual gains in property should not be treated as normal. Slower, steadier appreciation is more plausible.
- If holding stocks, control position size and lean toward large-cap blue chips. It also makes sense to tilt toward firms with substantial real economic activity rather than light-asset sectors or highly virtualized areas.
- If you already hold large amounts of stocks or bonds, decisions on reducing positions or cutting losses should depend on your actual holdings and your own judgment of economic conditions, not simply on headlines. Markets often recover before the real economy, sometimes by three to six months. But if the global squeeze lasts at least into 2023 and perhaps into mid-2024 or longer, then markets—especially in Europe and the United States—may still not have seen their real bottom.
- When contraction is at its worst, asset prices are often at their cheapest. That is when lower-priced quality assets—whether physical businesses or strong equities—can offer the best long-term value.
- For judging the stage of the economy, GDP or GNP growth is still one of the clearest indicators for ordinary people. There are many other indicators—CPI, PPI, confidence indexes, the yield curve, money velocity, credit growth—but they are harder to interpret correctly. Output data are backward-looking, but they are based on realized activity rather than speculative signals.
The real lesson is that downturns keep humbling people
Almost everyone likes to think they understand the economy. Yet every crisis has a way of re-educating the self-assured.
After each crisis, governments and economists produce a long list of reasons why this one was different, why it could not have been foreseen, why ordinary safeguards did not apply. But from a historical point of view, most crises are not that different in essence. The biggest variation is often only the timing of the explosion.
That is why the present slowdown should not be treated as a brief interruption followed by an easy return to normal. The underlying conflicts are deeper than inflation alone, deeper than the pandemic alone, and deeper than the war alone. For people with few assets—especially the poor—the costs will be felt most harshly, and often most quietly.