Daily Management Review

Global Growth Forecast Slashed By IMF Due To Impact Of Russia's Invasion In Ukraine


Global Growth Forecast Slashed By IMF Due To Impact Of Russia's Invasion In Ukraine
The International Monetary Fund lowered its prediction for  global economic growth by almost a full percentage point on Tuesday, because of Russia's invasion of Ukraine, while also issuing a warning that inflation has become a "clear and present concern" for many countries.
According to the IMF's current World Economic Outlook, the war is anticipated to delay growth and raise prices further, while the forecast is marked by "unusually high uncertainty."
Further restrictions on Russian energy and a broadening of the conflict, as well as a faster-than-expected downturn in China and a new outbreak of the epidemic, could weaken economy and raise inflation, triggering social discontent.
Given the war's direct repercussions on Russia and Ukraine, as well as global spillovers, the global lender reduced its estimates for the second time this year, now projecting global growth of 3.6 per cent in 2022 and 2023, down 0.8 and 0.2 percentage points from its January forecast.
Global growth is predicted to slow to around 3.3 per cent in the medium term, down from an average of 4.1 per cent from 2004 to 2013, and 6.1 per cent in 2021.
"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 increased inflation, which was already growing in many countries due to supply and demand mismatches caused by the epidemic, with the newest Chinese lockdowns likely to produce fresh bottlenecks in global supply chains.
According to the IMF, the war, which Russia calls as a "special military operation," has resulted in a devastating humanitarian situation in Eastern Europe, with approximately 5 million Ukrainians displaced to neighbouring nations.
Both Russia and Ukraine's economies were predicted to fall sharply, while the European Union's growth prediction for 2022 was slashed by 1.1 percentage points due to its reliance on Russian energy.
"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," Gourinchas said.
Reduced supplies of Russian oil, gas, and metals, as well as wheat and corn produced jointly by Russia and Ukraine, had pushed up prices in Europe, the Caucasus and Central Asia, the Middle East and North Africa, and Sub-Saharan Africa, but were impacting lower-income people all over the world.
Except for commodity exporters who gain from the spike in energy and food prices, the IMF has lowered its medium-term prognosis for all groups. It predicted that advanced economies would take longer to recover to its pre-pandemic output trend, while the gap between advanced and developing economies would likely continue, implying that the pandemic would leave "chronic scars."
The IMF predicted that inflation would rise for longer as a result of war-related commodity price hikes and broader pricing pressures, and warned that the situation may worsen if supply-demand imbalances worsened.
Inflation will be 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies in 2022, respectively, up 1.8 and 2.8 percentage points from January's prediction.
"Inflation has become a clear and present danger for many countries," Gourinchas wrote in the blog.
He said that the Federal Reserve of the United States and many other central banks had already begun to tighten monetary policy, but that war-related disruptions were exacerbating those pressures.
According to the IMF, there is a growing risk that inflation expectations would become de-anchored, requiring a more aggressive response from central banks, putting pressure on a wider variety of emerging market economies.
Financial conditions for emerging markets and developing countries tightened shortly after the invasion, and the repricing has been "largely orderly," but more tightening and capital outflows were possible.
The war had also heightened the prospect of the international economy becoming more permanently fragmented into geopolitical blocks with their own technology standards, cross-border payment networks, and reserve currencies.
"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," Gourinchas said.