IMF cuts global growth forecasts for third time in 2022

The International Monetary Fund (IMF) has cut its forecasts for global economic growth for this year and next for the third time since the start of 2022, while raising its forecasts for inflation.

In its latest world economic outlook report, the IMF said that risks to the global economy are “firmly to the downside” with the world’s three largest economies — the United States, China and Europe — stalling.

The Washington DC-based fund now expects the global economy to grow by 3.2 per cent this year and 2.9 per cent in 2023, cuts of 0.4 per cent and 0.7 per cent respectively from its April forecasts. Growth forecasts for the euro area have also been revised downwards by 0.2 per cent to 2.6 per cent this year, and 1.1 per cent to just 1 per cent in 2023.

Annual price inflation, meanwhile, has been revised upwards from 5.7 per cent in April for the world’s advanced economies to 6.6 per cent, and from 8.7 per cent to 9.5 per cent in emerging economies.

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The IMF warned that “several shocks have hit the world economy” that has already been weakened by the pandemic, causing global output to contract in the second quarter of the year.

This, the fund said, was due to downturns in China and Russia, “while US consumer spending undershot expectations”.

Potential “spillovers” from the war and the sanctions imposed on Russia could include, among other things, the “sudden stop” of European gas imports from Russia.

With Russian gas exports having fallen to about 40 per cent of 2021 levels this year, the fund said its latest baseline forecasts “incorporate the expectation that the volume will decline further to low levels by mid-2024, in line with major European economies’ energy independence goals”.

In China, meanwhile, the country’s “deepening real estate crisis” may also lead to “major global spillovers” while “lingering” supply chain bottlenecks from the pandemic and soaring food and energy prices have forced the IMF to raise its expectations for inflation.

Combined with the global impact of war in Ukraine on food supply chains, these factors have made the outlook “extraordinarily uncertain”, the fund said.

In one “plausible scenario” modelled by IMF economists, the fund said global growth could slow to 2.6 per cent this year and 2 per cent next year. This would “put growth in the bottom 10 per cent of outcomes since 1970″, the IMF said.

Higher-than-expected inflation in the world’s major economies is “triggering a major tightening of monetary and financial conditions”, said IMF chief economist Pierre-Olivier Gourinchas, with the European Central Bank following the US Federal Reserve and other central banks last week by raising interest rates.

Were this process to become “disorderly”, Mr Gourinchas said there would be “major implications for emerging markets and developing economies” including heightened debt vulnerabilities and even debt defaults.

But with rising prices continuing to squeeze living standards globally, he said: “Taming elevated inflation should be the first priority of policymakers around the world. This requires tightening monetary policy, as many central banks have started to do both in advanced economies and emerging markets.”

While tighter monetary policy will “have real economic costs, delay will only exacerbate them”, the IMF said.