IMF lowers growth forecast again due to inflation and war risks

The International Monetary Fund cut global growth forecasts again on Tuesday, warning that downside risks from high inflation and the Ukraine war could materialize and push the global economy to the brink of recession if left unchecked.

Global real GDP growth will slow to 3.2 percent in 2022 from a forecast of 3.6 percent released in April, the IMF said in an update to its World Economic Outlook. It added that global GDP actually contracted in the second quarter due to downturns in China and Russia.

The fund lowered its growth forecast for 2023 to 2.9 percent from the April estimate of 3.6 percent, citing the impact of tighter monetary policy.

Global growth had recovered to 6.1 percent in 2021 after the Covid-19 pandemic crushed global production with a 3.1 percent drop in 2020.

“The prospects have clouded over significantly since April. The world could soon be on the brink of a global recession, just two years after the last one,” IMF chief economist Pierre-Olivier Gourinchas said in a statement.

The fund said its latest forecasts were “extremely uncertain” and included downside risks from Russia’s war in Ukraine, which would push up energy and food prices. This would exacerbate inflation and anchor longer-term inflation expectations leading to further monetary tightening.

Under a “plausible” alternative scenario, which includes a complete halt to Russian gas supplies to Europe by the end of the year and a further 30 percent drop in Russian oil exports, the IMF said global growth could accelerate to 2.6 percent in 2022 and 2 percent would slow in 2023, with virtually zero growth in Europe and the United States over the next year.

Global growth has fallen below 2 percent just five times since 1970, the IMF said, including the 2020 COVID-19 recession.

The IMF said it now expects the inflation rate in advanced economies to reach 6.6 percent in 2022, up from 5.7 percent in the April forecasts, adding it would remain high for longer than previously expected. Inflation in emerging and developing markets is now expected to reach 9.5 percent in 2022, up from 8.7 percent in April.

“Inflation at current levels poses a clear risk to current and future macroeconomic stability and bringing it back on target for the central bank should be a top priority for policymakers,” Gourinchas said.

Monetary tightening will “bite” next year, slowing growth and putting pressure on emerging markets, but delaying this process “will only exacerbate the difficulties,” he said, adding that central banks “should stay the course until inflation is tamed”.

For the United States, the IMF confirmed its July 12 forecast of 2.3 percent growth in 2022 and anemic 1.0 percent growth for 2023, which it had previously lowered twice since April on slowing demand.

The fund cut China’s 2022 GDP growth forecast to 3.3 percent from 4.4 percent in April, citing COVID-19 outbreaks and widespread lockdowns in major cities that have curtailed production and exacerbated global supply chain disruptions.

The IMF also said the deepening crisis in China’s real estate sector is dragging down real estate sales and investments. It said additional fiscal support from Beijing could improve growth prospects, but a prolonged slowdown in China, driven by major virus outbreaks and lockdowns, would have a major impact.

The IMF cut its 2022 euro-zone growth outlook to 2.6 percent from 2.8 percent in April, reflecting inflationary spillovers from the war in Ukraine. But forecasts have been cut more for some countries more exposed to the war, including Germany, whose 2022 growth outlook was cut to 1.2 percent from 2.1 percent in April.

Italy, meanwhile, saw its 2022 growth outlook upgraded on improved prospects for tourism and industrial activity. But the IMF said last week Italy could suffer a deep recession under a Russian gas embargo.

Russia’s economy is expected to contract 6.0 percent in 2022 due to tightening Western financial and energy sanctions, and contract another 3.5 percent in 2023, the IMF said. It is estimated that Ukraine’s economy will shrink by about 45 percent as a result of the war, but the estimate is fraught with extreme uncertainty. IMF lowers growth forecast again due to inflation and war risks

Fry Electronics Team

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