IIF slashes global growth forecast on Ukraine war and China uncertainty

Capital flows to emerging markets predicted to fall 36% to $645bn in 2022, Institute of International Finance says

People inspect destroyed Russian tanks and armoured vehicles in Irpin, Ukraine. The war has dented global economic growth. Getty

The Institute of International Finance has slashed its forecast for the global economy this year as result of the war in Ukraine, uncertainty about China's growth, due to renewed lockdowns to fight the Covid-19 Omicron variant and rapidly rising interest rates.

"The confluence of these shocks threatens the global economy and raises the risk of a recession," the institute said in its latest global outlook report.

The global economy is now projected to grow 2.3 per cent in 2022, compared to an earlier 4.6 per cent estimate.

In April, the International Monetary Fund lowered its growth forecast for the global economy this year to 3.6 per cent, due to Russia's war in Ukraine and rising inflation that was stoked by soaring commodities prices.

"Our growth downgrades are most notable for the euro area, emerging Europe and China," the IIF said. "The rest of the world is impacted somewhat less adversely, given favourable terms of trade effects — especially in commodity-exporting Latin America — and less critical trade links to Russia and Ukraine.

"Risks to our forecast are tilted to the downside because markets are taking an increasingly dim view of central bank policy normalisation."

The US, the world's largest economy, is set to grow 2.5 per cent this year, down from 5.7 per cent in 2021 as the country's central bank continues to tighten monetary policy and interest rates rise.

Growth in China, the world's second-largest economy, was downgraded to 3.5 per cent this year from 5.1 per cent. This is largely a reflection of problems with the country's property sector and the effects of renewed lockdowns that are likely to lead to the economy contracting in the second quarter, the IIF said.

"The Omicron wave in China is more disruptive than we anticipated and will take a substantial toll on growth and capital flows," the IIF said.

China’s Covid Zero policy has caused its industrial output and consumer spending to slide to the worst levels since the health crisis began. Industrial output fell 2.9 per cent in April from a year ago, while retail sales contracted 11.1 per cent in the period and unemployment climbed to 6.1 per cent.

As a result of Russia's war in Ukraine, now in its fourth month, the IIF cut its growth forecast in the Euro zone this year to 1 per cent from an earlier 3 per cent estimate.

"This is a recession call," the IIF said.

"The risk of energy wars between Russia and Europe will also keep natural gas prices elevated.

"We worry about global food security with world food prices at a multi-decade high. Russia has already banned exports of grains and sugar, and Ukraine, one of the largest exporters of important staple foods, could see the sowing season and harvest impacted by the war."

In the Mena region, the institute said it sees "a return to strong growth and large current account surpluses," with "a certain degree of resilience" of oil exporting countries despite the challenging global growth environment.

The Mena's current account surplus is projected to surge to $400bn this year from $120bn in 2021, with the GCC accounting for 90 per cent of the total on the back of higher oil prices that have rallied more than 70 per cent since last year.

Growth in Saudi Arabia, the world's largest energy exporter, is forecast at 7.3 per cent this year.

Capital flows to emerging markets are likely to weaken markedly due to the elevated global recession risks, the IIF said.

The institute forecasts non-resident flows to emerging market countries, excluding China, to fall to $645bn in 2022 from about $1 trillion last year, while it expects a continuation of recent outflows in China.

"Overall, we expect global GDP to essentially flatline this year ... much of the negative drag obviously comes from Russia and Ukraine, where activity is collapsing," it said. "However, aside from these two countries, weakness is broad-based and leaves little margin for error."