A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022 as risks began to materialise, according to the International Monetary Fund’s (IMF) world economic outlook as of July 2022.
Global output contracted in the second quarter of this year, owing to downturns in China and Russia, while US consumer spending undershot expectations, the IMF said.
“Several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide––especially in the United States and major European economies––triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting Covid- 19 outbreaks and lockdowns; and further negative spillovers from the war in Ukraine,” the IMF said.
The baseline forecast is for growth to slow from 6.1 per cent last year to 3.2 per cent in 2022, 0.4 percentage point lower than in the April 2022 World Economic Outlook.
Lower growth earlier this year, reduced household purchasing power, and tighter monetary policy drove a downward revision of 1.4 percentage points in the US.
In China, further lockdowns and the deepening real estate crisis have led growth to be revised down by 1.1 percentage points, with major global spillovers. And in Europe, significant downgrades reflect spillovers from the war in Ukraine and tighter monetary policy, the IMF said.
Global inflation has been revised up due to food and energy prices as well as lingering supply-demand imbalances, and is anticipated to reach 6.6 per cent in advanced economies and 9.5 per cent in emerging market and developing economies this year—upward revisions of 0.9 and 0.8 percentage point, respectively.
In 2023, disinflationary monetary policy is expected to bite, with global output growing by just 2.9 per cent, the IMF said.
“The risks to the outlook are overwhelmingly tilted to the downside,” the Fund said.
The war in Ukraine could lead to a sudden stop of European gas imports from Russia; inflation could be harder to bring down than anticipated either if labour markets are tighter than expected or inflation expectations unanchor; tighter global financial conditions could induce debt distress in emerging market and developing economies; renewed Covid-19 outbreaks and lockdowns as well as a further escalation of the property sector crisis might further suppress Chinese growth; and geopolitical fragmentation could impede global trade and cooperation.
A plausible alternative scenario in which risks materialize, inflation rises further, and global growth declines to about 2.6 per cent and 2.0 per cent in 2022 and 2023, respectively, would put growth in the bottom 10 per cent of outcomes since 1970.
With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers.
Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them, the IMF said.
Targeted fiscal support can help cushion the impact on the most vulnerable, but with government budgets stretched by the pandemic and the need for a disinflationary overall macroeconomic policy stance, such policies will need to be offset by increased taxes or lower government spending.
Tighter monetary conditions will also affect financial stability, requiring judicious use of macroprudential tools and making reforms to debt resolution frameworks all the more necessary.
“Policies to address specific impacts on energy and food prices should focus on those most affected without distorting prices,” the IMF said.
“And as the pandemic continues, vaccination rates must rise to guard against future variants. Finally, mitigating climate change continues to require urgent multilateral action to limit emissions and raise investments to hasten the green transition,” it said.
(Photo: Leah Sawyer)
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