G-20 Discord Likely to Thwart Efforts to Boost Sagging Global Economy

Europe may already be slipping into recession as Russia throttles its energy supplies in retaliation for Western sanctions over Moscow’s invasion of Ukraine. Inflation spurred by that conflict is squeezing consumers and businesses around the world and heaping pressure on poorer countries through spiraling import bills for food and energy.

In response, central banks, foremost among them the U.S. Federal Reserve, have been aggressively raising interest rates, intensifying the squeeze on growth and driving up debt-servicing costs for heavily-indebted emerging-market governments.

“While we look at this gloomy picture, even more troubling is the trend towards increased fragmentation—at a time when we need each other the most,” International Monetary Fund Managing Director

Kristalina Georgieva

said Sunday. “And I am very concerned that we may be sleepwalking into a world that would be poorer and less secure as a result.”

A reprieve from those economic pressures looks remote. Central banks are telegraphing further interest-rate increases ahead. The U.S. and its allies are seeking to cap the price of Russian oil, while Saudi Arabia has led a push for oil exporters to cut production, both of which risk stoking energy prices further by squeezing supplies.

Meanwhile, the U.S. and China—the world’s two largest economies—are at loggerheads over issues ranging from trade and technology to national security and Taiwan, with aides setting low expectations for any significant thaw in relations when President Biden meets on Monday with Chinese leader

Xi Jinping.

Treasury Secretary

Janet Yellen

will meet with People’s Bank of China Gov.

Yi Gang

on the sidelines of the summit to discuss the global economic outlook, among other issues, according to a Treasury official.

Economists at Goldman Sachs in a report this past week said they estimate a U.S. ban on chip exports to China on national security grounds will shave around a quarter of a percentage point off China’s economic growth in 2023.

These and other tensions mean expectations for any coordinated economic response to the world’s challenges from this week’s G-20 summit are next to zero. With central banks focused on inflation, economists say it is up to governments to manage the fallout from rising interest rates, especially when problems spill over borders to poor countries from richer ones.

The G-20 has responded forcefully to economic downturns in the past. After the financial crisis, the world’s major economies agreed on a plan to recapitalize sinking banks and stimulate their economies with fiscal and monetary support.

Sri

Mulyani Indrawati,

the finance minister of G-20 host Indonesia, said the current environment stands in contrast to that episode. G-20 finance ministers have failed to reach agreement on even a customary joint statement at their last several gatherings, with the published versions spotlighting disagreements over the economic hit from the war and sanctions.

“I saw with my own eyes how the G-20 at that time really formulated that kind of policy, when all the leaders were in the same boat with the same concern with the same enemy,” she said in an interview last month, referring to the coordinated response following the 2008-09 financial crisis. “This one, they are enemies with each other.”

In its latest set of forecasts, the IMF said it expects the global economy to eke out growth of just 2.7% in 2023, with 31 of 72 economies expected to record two consecutive quarters of falling output sometime during this year and next—a standard definition of a technical recession. The fund expects the global economy to expand 3.2% this year, just over half the 6% pace it notched in 2021.

Economists surveyed by The Wall Street Journal last month put the probability of a recession in the next 12 months in the U.S. at 63%, up from 49% in July’s survey. Many economists expect a recession in the European Union and the U.K. in the coming months; data Friday showed the U.K. economy shrank in the third quarter. The IMF expects the gross domestic product in Germany and Italy to shrink in 2023, with the 19-nation eurozone as a whole forecast to expand just 0.5%.

“The worst is yet to come, and for many people 2023 will feel like a recession,” the fund said in its October economic outlook.

The problems aren’t confined to those stemming from global strife. China’s economy is laboring under Beijing’s zero-tolerance approach to Covid-19 and a worsening real-estate slump. With the U.S. and Europe slowing, that leaves the global economy with no obvious locomotive for growth, a role China has often played in the past when the Western world was sputtering.

China used to be the “global shock absorber of last resort,” said Gabriel Sterne, head of emerging-markets research at Oxford Economics in London. “That kind of feels like it has finished.”

For the G-20, a forum for 19 of the world’s big economies and the European Union, one of the most pressing economic problems is inflation, putting central banks rather than governments in the driver’s seat of economic policy.

U.S. consumer prices increased 7.7% in October from the same month a year ago, the Labor Department said Thursday. That marked a cooling from the summer when inflation reached the highest level in four decades, but remains well above the Federal Reserve’s 2% target.

The Fed is aggressively lifting rates to combat inflation, hoping higher borrowing costs will curb hiring, spending and investment. Officials last week increased their benchmark federal-funds rate by 0.75 percentage point—their sixth increase this year—bringing it to a range between 3.75% and 4%.

The European Central Bank in October raised its main policy rate by 0.75 percentage point for the second time in a row. The Bank of England this month raised its key interest rate, also by three quarters of a percentage point, an effort to tame surging inflation that the bank said will also help drive the U.K. economy into a recession lasting over a year.

The Fed and other central banks are signaling further tightening ahead to wring inflation out of their economies, but the increase in interest rates is compounding the stresses from surging prices in other parts of the world. Many countries’ currencies have plummeted in value against the U.S. dollar as rising interest rates suck capital into the U.S., raising the cost for imports and the servicing of foreign-currency debts.

Some nations with rickety finances have been hit hard, and the World Bank and other institutions have warned of the risk of further debt-related distress ahead. Bangladesh this month agreed a $4.5 billion support package with the IMF, joining a roster of countries that have sought the fund’s assistance this year that also includes Sri Lanka and Pakistan.

One thing the G-20 could do, said Mr. Sterne, is put pressure on lenders to speed up the process of easing debt burdens, amid concern progress hasn’t been fast enough under an international initiative known as the common framework. Other economists suggest leaders also consider tax breaks and other incentives to encourage private-sector participation in debt workouts, and prod borrowers to make full public disclosure of all their debts to foster trust.

Some economists say the global downturn may prove short-lived, especially if the Fed is able to bring inflation in the U.S. back toward target with only a modest cost in terms of jobs and growth, or if China dismantles its tough zero-Covid strategy and the economy there revs up. They also say the severity of any slowdown should be tempered by the fact that households, businesses and banks are in better financial health than they were before the pandemic, and especially before the crash of 2008-09 that pushed the global economy into recession.

But a coordinated effort to boost the global economy appears unlikely to emerge from the summit in Indonesia.

“After the global financial crisis, countries could band together and say we need fiscal stimulus to try to create jobs so that this isn’t a long damaging downturn. But now, countries have different amounts of fiscal space, different inflationary pressures,” Ms. Yellen said.

Write to Jason Douglas at jason.douglas@wsj.com and Andrew Duehren at andrew.duehren@wsj.com

Europe may already be slipping into recession as Russia throttles its energy supplies in retaliation for Western sanctions over Moscow’s invasion of Ukraine. Inflation spurred by that conflict is squeezing consumers and businesses around the world and heaping pressure on poorer countries through spiraling import bills for food and energy.

In response, central banks, foremost among them the U.S. Federal Reserve, have been aggressively raising interest rates, intensifying the squeeze on growth and driving up debt-servicing costs for heavily-indebted emerging-market governments.

“While we look at this gloomy picture, even more troubling is the trend towards increased fragmentation—at a time when we need each other the most,” International Monetary Fund Managing Director

Kristalina Georgieva

said Sunday. “And I am very concerned that we may be sleepwalking into a world that would be poorer and less secure as a result.”

A reprieve from those economic pressures looks remote. Central banks are telegraphing further interest-rate increases ahead. The U.S. and its allies are seeking to cap the price of Russian oil, while Saudi Arabia has led a push for oil exporters to cut production, both of which risk stoking energy prices further by squeezing supplies.

Meanwhile, the U.S. and China—the world’s two largest economies—are at loggerheads over issues ranging from trade and technology to national security and Taiwan, with aides setting low expectations for any significant thaw in relations when President Biden meets on Monday with Chinese leader

Xi Jinping.

Treasury Secretary

Janet Yellen

will meet with People’s Bank of China Gov.

Yi Gang

on the sidelines of the summit to discuss the global economic outlook, among other issues, according to a Treasury official.

Economists at Goldman Sachs in a report this past week said they estimate a U.S. ban on chip exports to China on national security grounds will shave around a quarter of a percentage point off China’s economic growth in 2023.

These and other tensions mean expectations for any coordinated economic response to the world’s challenges from this week’s G-20 summit are next to zero. With central banks focused on inflation, economists say it is up to governments to manage the fallout from rising interest rates, especially when problems spill over borders to poor countries from richer ones.

The G-20 has responded forcefully to economic downturns in the past. After the financial crisis, the world’s major economies agreed on a plan to recapitalize sinking banks and stimulate their economies with fiscal and monetary support.

Sri

Mulyani Indrawati,

the finance minister of G-20 host Indonesia, said the current environment stands in contrast to that episode. G-20 finance ministers have failed to reach agreement on even a customary joint statement at their last several gatherings, with the published versions spotlighting disagreements over the economic hit from the war and sanctions.

“I saw with my own eyes how the G-20 at that time really formulated that kind of policy, when all the leaders were in the same boat with the same concern with the same enemy,” she said in an interview last month, referring to the coordinated response following the 2008-09 financial crisis. “This one, they are enemies with each other.”

In its latest set of forecasts, the IMF said it expects the global economy to eke out growth of just 2.7% in 2023, with 31 of 72 economies expected to record two consecutive quarters of falling output sometime during this year and next—a standard definition of a technical recession. The fund expects the global economy to expand 3.2% this year, just over half the 6% pace it notched in 2021.

Economists surveyed by The Wall Street Journal last month put the probability of a recession in the next 12 months in the U.S. at 63%, up from 49% in July’s survey. Many economists expect a recession in the European Union and the U.K. in the coming months; data Friday showed the U.K. economy shrank in the third quarter. The IMF expects the gross domestic product in Germany and Italy to shrink in 2023, with the 19-nation eurozone as a whole forecast to expand just 0.5%.

“The worst is yet to come, and for many people 2023 will feel like a recession,” the fund said in its October economic outlook.

The problems aren’t confined to those stemming from global strife. China’s economy is laboring under Beijing’s zero-tolerance approach to Covid-19 and a worsening real-estate slump. With the U.S. and Europe slowing, that leaves the global economy with no obvious locomotive for growth, a role China has often played in the past when the Western world was sputtering.

China used to be the “global shock absorber of last resort,” said Gabriel Sterne, head of emerging-markets research at Oxford Economics in London. “That kind of feels like it has finished.”

For the G-20, a forum for 19 of the world’s big economies and the European Union, one of the most pressing economic problems is inflation, putting central banks rather than governments in the driver’s seat of economic policy.

U.S. consumer prices increased 7.7% in October from the same month a year ago, the Labor Department said Thursday. That marked a cooling from the summer when inflation reached the highest level in four decades, but remains well above the Federal Reserve’s 2% target.

The Fed is aggressively lifting rates to combat inflation, hoping higher borrowing costs will curb hiring, spending and investment. Officials last week increased their benchmark federal-funds rate by 0.75 percentage point—their sixth increase this year—bringing it to a range between 3.75% and 4%.

The European Central Bank in October raised its main policy rate by 0.75 percentage point for the second time in a row. The Bank of England this month raised its key interest rate, also by three quarters of a percentage point, an effort to tame surging inflation that the bank said will also help drive the U.K. economy into a recession lasting over a year.

The Fed and other central banks are signaling further tightening ahead to wring inflation out of their economies, but the increase in interest rates is compounding the stresses from surging prices in other parts of the world. Many countries’ currencies have plummeted in value against the U.S. dollar as rising interest rates suck capital into the U.S., raising the cost for imports and the servicing of foreign-currency debts.

Some nations with rickety finances have been hit hard, and the World Bank and other institutions have warned of the risk of further debt-related distress ahead. Bangladesh this month agreed a $4.5 billion support package with the IMF, joining a roster of countries that have sought the fund’s assistance this year that also includes Sri Lanka and Pakistan.

One thing the G-20 could do, said Mr. Sterne, is put pressure on lenders to speed up the process of easing debt burdens, amid concern progress hasn’t been fast enough under an international initiative known as the common framework. Other economists suggest leaders also consider tax breaks and other incentives to encourage private-sector participation in debt workouts, and prod borrowers to make full public disclosure of all their debts to foster trust.

Some economists say the global downturn may prove short-lived, especially if the Fed is able to bring inflation in the U.S. back toward target with only a modest cost in terms of jobs and growth, or if China dismantles its tough zero-Covid strategy and the economy there revs up. They also say the severity of any slowdown should be tempered by the fact that households, businesses and banks are in better financial health than they were before the pandemic, and especially before the crash of 2008-09 that pushed the global economy into recession.

But a coordinated effort to boost the global economy appears unlikely to emerge from the summit in Indonesia.

“After the global financial crisis, countries could band together and say we need fiscal stimulus to try to create jobs so that this isn’t a long damaging downturn. But now, countries have different amounts of fiscal space, different inflationary pressures,” Ms. Yellen said.

Write to Jason Douglas at jason.douglas@wsj.com and Andrew Duehren at andrew.duehren@wsj.com