IMF lowers 2022 global economic growth to 4.4% on Omicron and inflation concerns

The half a percentage point revision largely reflects forecast markdowns in the US and China, the lender said in its latest World Economic Outlook

The International Monetary Fund headquarters. The Washington-based lender has revised down its forecast for global economic output by half a percentage point. Reuters

The International Monetary Fund lowered its global economic growth forecast for this year, as Omicron continues to spread unabated and supply chain disruptions stoke inflation amid higher energy prices.

The fund, which estimated the global economy would expand by 5.9 per cent in 2021, revised down its 2022 output projections to 4.4 per cent, half a percentage point lower than its estimate in October, it said in its latest World Economic Outlook on Tuesday.

“The continuing global recovery faces multiple challenges as the pandemic enters its third year,” Gita Gopinath, first deputy managing director of the IMF, said in a separate blog post.

“Record debt and rising inflation constrain the ability of many countries to address renewed disruptions.”

Global growth is expected to reach 3.8 per cent in 2023, a 0.2 percentage point higher than projected in the IMF’s October forecast, which, it said, was largely a mechanical pickup after current drags on growth dissipate in the second half of 2022.

However, next year's forecast is conditional on adverse health outcomes declining to low levels in most countries by the end of 2022, assuming vaccination rates improve worldwide and therapies become more effective.

The global economy has entered 2022 in a weaker-than-anticipated position. The rapid spread of the Omicron variant of Covid-19 led to increased mobility restrictions and financial market volatility at the end of last year. Supply disruptions have continued to weigh on activity and inflation has been higher than anticipated.

The 0.5 percentage point revision for 2022's economic output largely reflects the forecast markdowns in the US and China, the world’s two largest economies, the IMF said.

Advanced economies, which are estimated to have grown 5 per cent in 2021, are now set to grow 3.9 per cent this year, 0.6 percentage points lower than estimated in October. The growth is expected to moderate further to 2.6 per cent, which is still an improvement of 0.4 percentage points from the previous forecast.

The US is estimated to have registered a growth of 5.6 per cent last year. It is forecast to expand 4 per cent in 2022, which is 1.2 percentage points lower than the IMF’s October projection. The fund estimates growth for the US to reach 2.6 per cent in 2023.

“This reflects lower prospects of legislating the Build Back Better fiscal package, an earlier withdrawal of extraordinary monetary accommodation and continued supply disruptions,” Ms Gopinath said.

Germany, Europe's biggest economy, is set to expand 3.8 per cent in 2022, a 0.8 percentage point downwards revision from October estimates. France, the euro area's second-largest economy, is forecast to grow 3.5 per cent, reflecting a 0.4 percentage point drop from the previous estimate.

Japan, the world's third-largest economy, is projected to grow 3.3 per cent this year after expanding an estimated 1.6 per cent in 2021. The UK, the world's fifth-largest economy, is expected to expand 4.7 per cent in 2022 after growing 7.2 per cent in 2021, IMF data show.

The world is facing prospects of this year being even more difficult than the last for the global economy, IMF chief Kristalina Georgieva said last week. Inflation is more persistent and broad-based than previously anticipated, forcing policymakers to tighten accommodative monetary policy.

Inflation in the US jumped to 7 per cent in December from a year earlier, the highest inflation rate since 1982, heightening financial pressures on American households. In the UK, inflation hit 5.4 per cent in December — its highest reading since 1992 — as the country heads into a cost-of-living crisis amid higher energy prices and taxes.

The IMF said it expects inflation to remain elevated in the near term, averaging 3.9 per cent in advanced economies and 5.9 per cent in emerging market and developing economies in 2022.

“We have revised up our 2022 inflation forecasts for both advanced and emerging market and developing economies, with elevated price pressures expected to persist for longer,” Ms Gopinath said.

However, assuming medium-term inflation expectations remain “well anchored” and the pandemic eases its grip, higher inflation should fade as supply chain disruptions ease, monetary policy tightens and demand rebalances away from goods-intensive consumption towards services, the IMF said.

The rapid increase in fuel prices is also expected to moderate during 2022—23, which will help contain headline inflation.

Futures markets indicate oil prices will rise about 12 per cent and natural gas prices about 58 per cent in 2022 — both considerably lower than the increases seen in 2021 — before retreating in 2023 as supply-demand imbalances recede further, the fund said.

Even as recoveries continue, the “troubling divergence in prospects across countries persists”, the IMF said.

Advanced economies are projected to return to pre-pandemic trend this year, however, several emerging markets and developing economies are projected to have sizeable output losses in the medium term.

Emerging market and developing economies that expanded by an estimated 6.5 per cent in 2021 are now projected to grow 4.8 per cent this year and 4.7 per cent in 2023. China, the world’s second-largest economy that grew an estimated 8.1 per cent in 2021, is expected to grow 4.8 per cent this year, revised down 0.8 percentage points from previous projection.

The retrenchment in China’s real estate sector appears to be more drawn out and the recovery in private consumption is weaker than previously expected, the IMF said.

The fund expects India’s economy to grow by 9 per cent in 2022 after expanding by the same ratio last year. It projects Asia’s third-largest economy will grow by 7.1 per cent in 2023, a half a percentage point revision up from the previous estimate.

“India’s prospects for 2023 are marked up on expected improvements to credit growth — and subsequently, investment and consumption — building on better-than-anticipated performance of the financial sector,” the IMF said.

The Middle East and Central Asia are forecast to grow 4.3 per cent in 2022 and 3.6 per cent next year. Saudi Arabia, the Arab world’s largest economy, is forecast to grow 4.8 per cent after expanding 2.9 per cent last year, helped by the rally in oil prices, which is continuing this year.

Low-income and developing countries are projected to expand 4.8 per cent this year, a 0.3 percentage point downwards revision from October estimates. These economies are expected to grow 4.6 per cent in 2023.

Less accommodative monetary policy in the US is expected to prompt tighter global financial conditions, putting pressure on currencies from emerging market and developing economies. The US Federal Reserve is widely expected to start increasing rates in March to tame inflation.

Governments and central banks across the world have provided more than $16 trillion in fiscal and $9tn in monetary support to help economies recover from the worst economic crisis since the 1930s. Government, quasi-government, financial institutions and corporate borrowers took advantage of ample liquidity and borrowed extensively during the past two years to shore up capital buffers and cope with the pandemic challenges.

Global debt soared to $226tn in 2020, the largest 12-month debt surge since the Second World War, and it continues to rise.

However, a higher interest rate regime will make borrowing more expensive worldwide, straining public finances and adding to pressure on countries with high foreign currency debt.

“As the monetary policy stance tightens more broadly this year, economies will need to adapt to a global environment of higher interest rates,” Ms Gopinath said.

“Emerging market and developing economies with large foreign currency borrowing and external financing needs should prepare for possible turbulence in financial markets by extending debt maturities as feasible and containing currency mismatches.”

Although fiscal consolidation is expected in many emerging market and developing economies in 2022, high post-pandemic debt burdens will be a challenge for years to come.

“Both fiscal and monetary policies will need to work in tandem to achieve economic goals,” Ms Gopinath said. “Given the high level of uncertainty, policies must also remain agile and adapt to incoming economic data.”

The balance of risks this year remains tilted to the downside, with the outlook for the global economy depending critically on factors including the path of the pandemic, the impact of less accommodative US monetary policy on global markets, the easing of supply chain disruptions, the improvement in labour market conditions and the energy price trajectory.

“An exit from the pandemic and a full economic recovery are both within the grasp of the global community,” the IMF said.

“More limited fiscal space than earlier in the pandemic and rising inflation, however, pose difficult policy challenges. Bold and effective international co-operation will therefore be essential.”