IMF cuts global growth forecast as war in Ukraine has greater impact

The International Monetary Fund on Tuesday cut its forecast for global economic growth by nearly a full percentage point, citing Russia’s war in Ukraine and warning that inflation is now a “clear and present threat” for many countries.

The war is expected to slow growth and further increase inflation, the IMF said in its latest World Economic Outlook, while warning that its forecast was marred by “unusually high levels of uncertainty”.

Further sanctions on Russian energy and an escalation of the war, a worse-than-expected slowdown in China and a renewed flare-up in the pandemic could further slow growth and boost inflation, while rising prices could spark social unrest.

The global lender, which downgraded its forecasts for the second time this year, said it now forecasts global growth of 3.6 percent in 2022 and 2023, down 0.8 and 0.2 percentage points from its forecast from January, given the direct impact of the war on Russia and Russia Ukraine and global spillovers.

Medium-term global growth is expected to slow to around 3.3 percent in the medium term, compared with an average of 4.1 percent over the period 2004-2013 and growth of 6.1 percent in 2021.

“The global economic outlook has been thrown back sharply, mainly because of the Russian invasion of Ukraine,” IMF chief economist Pierre-Olivier Gourinchas wrote in a blog published on the revised outlook on Tuesday.

The war has exacerbated inflation, which had already risen in many countries due to supply and demand imbalances related to the pandemic, with recent lockdowns in China likely to create new bottlenecks in global supply chains.

The war, which Russia is calling a “special military operation,” has created a tragic humanitarian crisis in Eastern Europe and displaced some 5 million Ukrainians to neighboring countries, the IMF said.

Both Russia and Ukraine were expected to see their economies sharply contract, while the European Union – which is heavily dependent on Russian energy – had cut its 2022 growth forecast by 1.1 percentage points.

“The war adds to the series of supply shocks that have hit the global economy in recent years. Like seismic waves, its impact will spread far and wide — via commodity markets, trade and financial connections,” Gourinchas said.

Reduced shipments of oil, gas and metals from Russia, as well as wheat and corn – from both Russia and Ukraine – had prices in Europe, the Caucasus and Central Asia, the Middle East and North Africa and sub-Saharan Africa sharply in skyrocketed but hurt low-income households around the world.

The IMF said it had revised down its medium-term outlook for all groups except commodity exporters, which benefit from rising energy and food prices.

It said advanced economies would take longer to recover to their pre-pandemic output trend, while divergence between advanced and developing economies was likely to persist, suggesting some “permanent scar” from the pandemic.

The IMF said inflation was now likely to stay elevated for longer, on the back of war-related commodity price hikes and rising price pressures, and warned the situation could worsen if supply-demand imbalances widen.

For 2022, it forecast inflation of 5.7 percent in advanced economies and 8.7 percent in emerging and developing economies, a jump of 1.8 and 2.8 percentage points, respectively, from the January forecast.

“Inflation has become a clear and present danger for many countries,” Mr Gourinchas wrote on the blog.

He said the US Federal Reserve and many other central banks had already moved to tighten monetary policy, but war-related disruptions would add to those pressures.

The IMF said there was a rising risk that inflation expectations could become unanchored, leading to a more aggressive tightening response that could put pressure on a broader range of emerging markets.

Financial conditions for emerging and developing economies tightened immediately after the invasion and the repricing was “broadly orderly” but further tightening was possible, as were capital outflows.

The war had also increased the risk of a more permanent fragmentation of the world economy into geopolitical blocs with different technology standards, cross-border payment systems and reserve currencies.

“Such a ‘tectonic shift’ would cause long-term inefficiencies, increase volatility and pose a major challenge to the rules-based framework that has governed international and economic relations for the past 75 years,” Gourinchas said. IMF cuts global growth forecast as war in Ukraine has greater impact

Fry Electronics Team

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