IMF cuts global growth on 'gloomy' outlook of Ukraine war, China slowdown and inflation

With increasing prices squeezing living standards worldwide, taming inflation should be the first priority for policymakers, fund says

Storm clouds pass over the US Capitol in Washington.  US inflation is at a four-decade high. Reuters
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The International Monetary Fund lowered its growth forecast for the global economy for the second time this year, due to Russia’s war in Ukraine that has exacerbated inflationary pressures and derailed the momentum of the recovery from the Covid-19 pandemic and a slowdown in China.

The IMF now projects global growth at 3.2 per cent in 2022 and 2.9 per cent in 2023, revising it down 0.4 and 0.7 percentage points from its April forecast, respectively. This compares with a 6.1 per cent expansion last year.

The fund warned if further risks materialise and inflation rises further, global growth could decline to about 2.6 per cent and 2 per cent in 2022 and 2023, respectively, which would put growth in the bottom 10 per cent of outcomes since 1970.

"The global economy ... is facing an increasingly gloomy and uncertain outlook," said Pierre-Olivier Gourinchas, the IMF's chief economist.

The revision largely reflects the global spillover of Russia’s military offensive in Ukraine and the slashing of growth forecasts for advanced economies and China by more than half, all of which weighed on the outlook.

A four-decade high inflation in the US, the world's largest economy, as well as the UK and a similar trajectory in major European economies has led to central banks increasing interest rates.

A slowdown in China’s economy has added to global supply chain disruptions and crimped global growth. The world's second largest economy grew at the slowest pace since the initial coronavirus outbreak in 2020 in the second quarter of this year, due to renewed Covid-19 outbreaks and the country's zero-Covid approach that led to fresh lockdowns.

The confluence of all these elements led to global output contracting in the second quarter of this year.

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Advanced economies are now set to grow 2.5 per cent this year, compared with an earlier 3.3 per cent estimate and after expanding 5.2 per cent in 2021. The US, the biggest of the group, is forecast to expand 2.3 per cent instead of a previous 3.7 per cent estimate and down from 5.7 per cent last year.

Rising consumer prices forced the US Federal Reserve last month to raise its policy rate by a larger-than-expected 0.75 percentage point, its biggest rate rise since 1994. The central bank is expected to raise rates again on Wednesday, as it aims to bring inflation down towards its target range of 2 per cent. Inflation in the US hit 9.1 per cent in June, the highest level since 1981.

Germany, Europe's largest economy, is set to grow to 1.2 per cent this year and slow down to 0.8 per cent in 2023, after it expanded 2.9 per cent in 2021. France, the euro area's second-largest economy, is forecast to grow 2.3 per cent this year with output estimated at 1 per cent in 2023, after a 6.8 per cent expansion in 2021.

Japan, the world's third-largest economy, which has started to welcome visitors as part of tour groups, is projected to grow 1.7 per cent this year and next. The UK, the world's fifth-largest economy, is expected to expand 3.2 per cent in 2022 and decelerate to 0.5 per cent in 2023, after expanding 7.4 per cent last year.

Emerging market and developing economies are now projected to grow 3.6 per cent this year, down from 6.8 per cent in 2021, with China's output slowing to 3.3 per cent after an 8.1 per cent expansion last year.

The Middle East and Central Asia are forecast to grow 4.8 per cent after expanding 5.8 per cent in 2021. Saudi Arabia, the Arab world’s largest economy, is forecast to grow 7.6 per cent after expanding 3.2 per cent last year. The kingdom, the world's largest exporter of oil, has benefited from the rally of crude prices this year after Brent, the global benchmark for two thirds of the world's oil, rose about 67 per cent in 2021 and gained about 37 per cent since the start of this year.

Oil prices soared to nearly $140 a barrel in March, their highest since 2008, after the US said it would ban the import of Russian crude and the EU would follow suit, in a bid to freeze the world's second largest energy exporter out of global markets and isolate Moscow economically for its military offensive in Ukraine.

Futures prices point to oil prices averaging $103.88 per barrel in 2022, about 50 per cent higher than the 2021 average and are expected to fall to $91.07 in 2023, according to the fund.

The IMF pointed to increasing risks for some countries as borrowing costs rise amid rising inflation after governments and central banks across the world, which provided more than $16 trillion of fiscal and $9tn of monetary support to help economies recover, tighten policy.

Market dynamics are different today from the 1970s and early 1980s when surpluses from oil exporters increased funding for emerging market economy debt markets and central banks tightened policies to fight high inflation.

While the past situation led to debt defaults in countries in Latin America, the increased exposure to other large bilateral creditors today and the recent pandemic have brought new vulnerabilities, driving up public debt and eroding future potential growth in many countries, the fund said.

About 60 per cent of low-income countries are in or at high risk of debt distress, compared with 20 per cent a decade ago, the IMF estimates.

Higher borrowing costs, diminished credit flows, a stronger dollar and weaker growth will push even more into distress, Mr Gourinchas said.

Looking ahead, fighting inflation should be a key policy imperative, he said.

Inflation is forecast to average 8.3 per cent globally this year, with an aggregate of 6.6 per cent in advanced economies and 9.5 per cent across emerging market and developing economies.

"Inflation at current levels represents a clear risk for current and future macroeconomic stability and bringing it back to central bank targets should be the top priority for policymakers," Mr Gourinchas said.

"The resulting synchronised monetary tightening across countries is historically unprecedented, and its effects are expected to bite, with global growth slowing next year and inflation decelerating."

While tighter monetary policy will have real economic costs, delaying it will only exacerbate the hardship, he said.

Central banks that have started tightening should continue until inflation is tamed and targeted fiscal support can help cushion the impact on the most vulnerable.

"With government budgets stretched by the pandemic and the need for an overall disinflationary macroeconomic policy stance, offsetting targeted support with higher taxes or lower government spending will ensure that fiscal policy does not make the job of monetary policy even harder," Mr Gourinchas said.

Updated: July 27, 2022, 7:45 AM
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