The International Monetary Fund (IMF) has slashed its forecast for global growth this year on the back of Russia's war in Ukraine, while warning that heightened levels of inflation now pose a significant risk to low-income households in many countries.
In its latest world economic outlook report, the Washington-based fund said the conflict had led to extensive loss of life; triggered the biggest refugee crisis in Europe since the second World War; and severely set back the global recovery.
Downgrading its forecasts for the second time this year, the IMF said it was now projecting growth of 3.6 per cent this year and next, a drop of 0.8 and 0.2 percentage points respectively on its January forecast, given the war's direct impacts on Russia and Ukraine and global spillovers through commodity markets, trade, and – to a lesser extent – financial interlinkages.
It also warned that its forecasts were marked by "unusually high uncertainty". Further sanctions on Russian energy and a widening of the war, a sharper-than-forecast deceleration in China and a renewed flare-up of the pandemic could further slow growth and boost inflation, it said, adding that rising prices could trigger social unrest.
New bottlenecks
“Global economic prospects have been severely set back, largely because of Russia’s invasion of Ukraine,” IMF chief economist Pierre-Olivier Gourinchas wrote in a blog released Tuesday with the revamped outlook. The war has exacerbated inflation that had been rising already in many countries due to imbalances in supply and demand linked to the pandemic, with the latest lockdowns in China likely to cause new bottlenecks in global supply chains.
In its report, the IMF warned that the Ukraine conflict had further increased commodity prices and intensified supply disruptions, meaning inflation would remain higher for longer, and that central banks now faced a difficult and complicated trade-off between containing price pressures and safeguarding growth.
For 2022, it forecast inflation of 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies, a jump of 1.8 and 2.8 percentage points from January’s forecast. There was a risk that inflation expectations become de-anchored, prompting a more aggressive tightening response, it said, which could put pressure on a wider range of emerging market economies.
“Inflation has become a clear and present danger for many countries,” Mr Gourinchas wrote in the blog.
Contractions
The war had also increased 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, it 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,” Mr Gourinchas said.
The IMF said both Russia and Ukraine were expected to experience steep contractions in their economies, while the European Union – which is highly dependent on Russian energy – had seen its 2022 growth forecast cut by 1.1 percentage points.
“The war adds to the series of supply shocks that have struck the global economy in recent years. Like seismic waves, its effects will propagate far and wide through commodity markets, trade, and financial linkages,” Mr Gourinchas said.
Reduced supplies of oil, gas and metals produced by Russia, and wheat and corn – produced by both Russia and Ukraine – had driven up prices sharply in Europe, the Caucasus and Central Asia, the Middle East and North Africa, and sub-Saharan Africa, but was hurting lower-income households around the world.
