IMF lowers global growth projections as Ukraine-Russia war dents economic prospects

The fund expects inflation to reach 5.7% in advanced economies and 8.7% in emerging market and developing states amid surging prices of commodities

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The International Monetary Fund lowered its growth forecast for the global economy this year, as Russia’s war in Ukraine severely dents economic prospects and inflation stoked by soaring commodities prices threatens to derail momentum.

The IMF now projects global growth at 3.6 per cent in 2022 and 2023, revising it down 0.8 and 0.2 percentage points from its January forecast, respectively.

“Global economic prospects have been severely set back, largely because of Russia’s invasion of Ukraine,” Pierre-Olivier Gourinchas, economic counsellor and director of research at the IMF, said.

“Beyond its immediate and tragic humanitarian impact, the war will slow economic growth and increase inflation.”

The revision largely reflects the global spillovers of Russia’s military offensive in Ukraine and its devastating impact on both their economies.

Globally, overall economic risks have risen sharply, and policy tradeoffs have become even more challenging, the IMF said in its latest World Economic Outlook on Tuesday.

The latest lockdowns in China as part of Beijing's strict zero-Covid-19 strategy could cause new bottlenecks in global supply chains and may further crimp economic momentum, the fund said.

On Monday, The World Bank also cut its forecast for global growth to 3.2 per cent from its earlier expectation of 4.1 per cent.

Global growth, which the IMF estimates at 6.1 per cent in 2021, is likely to decline to about 3.3 per cent over the medium term. This forecast assumes the conflict remains confined to Ukraine, further western sanctions on Russia exempt its energy sector and the pandemic’s health and economic impacts abate over the course of 2022.

“With a few exceptions, employment and output will typically remain below pre-pandemic trends through 2026,” Mr Gourinchas said.

The war could reduce global gross domestic product by as much as 1 per cent, or about $1 trillion, by 2023, and add up to 3 per cent to global inflation in 2022 and approximately 2 percentage points next year, according to the UK’s National Institute for Economic and Social Research.

The IMF expects inflation to reach 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies — 1.8 and 2.8 percentage points higher than projected in January, respectively Inflation in 2023 is projected at 2.5 per cent for advanced economies and 6.5 per cent for emerging market and developing states.

The sharp rise in oil and gas prices is further stoking inflation and crimping growth. Russia is a major supplier of oil, gas and metals, and, together with Ukraine, of wheat and corn. A supply crunch of these commodities has already driven prices up sharply.

Europe, Caucasus, Central Asia, Middle East and North Africa, and sub-Saharan Africa are among the most affected regions by commodity-driven inflation. The food and fuel price increases will hurt lower-income households globally, including those in the Americas and Asia, according to the IMF.

“Inflation is expected to remain elevated for longer than in the previous forecast, driven by war-induced commodity price increases and broadening price pressures,” Mr Gourinchas said.

Advanced economies are now set to grow 3.3 per cent this year, 0.6 percentage points below the fund's January estimate. Growth is expected to decelerate further to 2.4 per cent in 2023, 0.2 percentage points slower than the previous projections.

The US, the biggest of the group and the world's largest economy, is forecast to expand 3.7 per cent in 2022 and 2.3 per cent next year, 0.3 percentage points slower than the fund’s January projection. The country's economy is estimated to have expanded 5.7 per cent in 2021.

“The economic effects of the war are spreading far and wide - like seismic waves that emanate from the epicentre of an earthquake - mainly through commodity markets, trade and financial linkages,” Mr Gourinchas said.

The euro area GDP growth for this year has been revised down to 2.8 per cent by the fund, 1.1 percentage points lower than in January, with the biggest downgrades in economies such as Germany and Italy that have relatively large manufacturing sectors and greater dependence on energy imports from Russia.

Germany, Europe's largest economy, is now set to expand 2.1 per cent in 2022, 1.7 percentage points lower than January estimates. France, the euro area's second-largest economy, is forecast to grow 2.9 per cent per cent and Italy’s GDP is projected to grow 2.3 per cent this year.

“Because they are net energy importers, higher global prices represent a negative terms-of-trade shock for most European countries, translating to lower output and higher inflation,” according to the IMF.

Japan, the world's third-largest economy, is expected to expand 2.4 per cent, while the UK’s economy is projected to grow 3.7 per cent this year after expanding 7.4 per cent last year.

In the UK, "consumption is projected to be weaker than expected as inflation erodes real disposable income, while tighter financial conditions are expected to cool investment”, the IMF research director said.

Emerging and developing Europe, including Russia and Ukraine, will see GDP contract by about 2.9 per cent in 2022. The region's growth is expected to recover in 2023 and expand 1.3 per cent.

The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems and reserve currencies
Pierre-Olivier Gourinchas, economic counsellor and director of research, IMF

The IMF projects economies of both Russia and Ukraine to contract sharply in 2022. Ukraine’s economic output is expected to shrink by 35 per cent and even if the war ends soon, economic activity will remain hamstrung for many years to come, the Washington-based fund said.

Russia’s GDP is expected to contract by about 8.5 per cent this year and a further 2.3 per cent in 2023, which is 11.3 and 4.4 percentage points lower than the fund's January forecast, respectively. In March, the Institute of International Finance projected the Russian economy to shrink 15 per cent this year, with economic contraction expected to be twice as severe as the 2009 recession.

The IMF expects emerging market and developing economies to grow 6.4 per cent this year, with China and India hitting 8.2 per cent and 4.4 per cent growth, respectively.

The Middle East and Central Asia economies are forecast to grow 3.8 per cent in 2022 and 4.4 per cent next year, a 1 and 0.3 percentage points downward revision from January projections. These economies expanded 6.8 per cent in 2021.

Saudi Arabia, the Arab world’s largest economy, is forecast to grow 7.6 per cent this year, 2.8 percentage point revision higher than January estimates. The Saudi economic forecast is also revised, up by 0.8 percentage points for 2023 to 3.6 per cent, the IMF said.

The kingdom, the world's largest exporter of oil, has benefitted from the rally in crude prices that surged 67 per cent last year and are up more than 40 per cent this year amid volatile trading on the back of the war in Ukraine.

Low income and developing countries are projected to expand 4.6 per cent in 2022 and 5.4 per cent next year. LDCs saw their economies grow 4 per cent in 2021, the IMF said.

The fund also revised downwards the medium-term outlook for all groups, except commodity exporters who benefit from the surge in energy and food prices.

“Aggregate output for advanced economies will take longer to recover to its pre-pandemic trend,” Mr Gourinchas said in a separate blog post.

“The divergence that opened up in 2021 between advanced and emerging market and developing economies is expected to persist, suggesting some permanent scarring from the pandemic.”

Inflation was a “clear and present danger” for many countries even before the war began, however, immediately after the conflict broke out, financial conditions tightened for emerging markets and developing countries.

So far, this repricing has been mostly orderly, yet several “financial fragility risks remain” that raise the prospect of a sharp tightening of global financial conditions as well as capital outflows, the IMF said.

On the fiscal side, policy space was already eroded in many countries due to the extraordinary steps taken during the pandemic. The surge in commodity prices and the increase in global interest rates will further reduce fiscal space, especially for oil and food-importing emerging markets and developing economies.

“The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems and reserve currencies,” Mr Gourinchas said.

“Such a ‘tectonic shift’ would cause long-run efficiency losses, increase volatility and represent a major challenge to the rules-based framework that has governed international and economic relations for the last 75 years.”

Uncertainty around the IMF estimates is considerable, "well-beyond the usual range” and growth could slow down further while inflation could “exceed our projections”, he said.

In this difficult environment, central banks will need to adjust their policies decisively to ensure that medium and long-term inflation expectations remain anchored.

“Several economies will also need to consolidate their fiscal balances,” he said.

Updated: April 19, 2022, 1:54 PM