The lingering Russia-Ukraine war, coupled with effects of inflation have significantly worsened global growth prospects, according to the International Monetary Fund (IMF) which, on Tuesday, sliced its earlier global growth forecasts down to 3.4%.
The war in Ukraine has triggered a costly humanitarian crisis that demands a peaceful resolution. At the same time, economic damage from the conflict will contribute to a significant slowdown in global growth in 2022 and add to inflation.
Fuel and food prices have increased rapidly, hitting vulnerable populations in low-income countries hardest.
Consequently, Global growth is now projected to slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than projected in January.
Beyond 2023, global growth is forecast to decline to about 3.3 percent over the medium term.
Those impacts are outlined in the World Economic Outlook report, released at the beginning of the Spring Meetings of the IMF and World Bank in Washington, DC by the IMF’s new chief economist, Pierre-Olivier Gourinchas.
The IMF slashed growth forecasts for advanced economies to 3.3 % and 3.8% for the emerging markets and developing economies.
However, Nigeria’s economy is expected to strengthen to 3.4% in 2022, on elevated oil prices, and then slows to 3.1% in 2023.
War-induced commodity price increases and broadening price pressures have led to 2022 inflation projections of 5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected last January.
“Well, there is a significant downgrade to our growth projections for the global economy from 4.4 percent as of January to 3.6 percent in our latest update. 0.8 percentage point difference,” Gourinchas said during the WEO press conference of the spring meetings which is holding virtually for the third straight time since the covid pandemic broke out early 2020.
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There are three main reasons for this downgrade, he said. First, the war invasion of Ukraine by Russia, which is increasing energy and commodity prices around the world and is leading to less output and more inflation which is higher in most countries and is expected to persist longer.
In addition, there has been a slowdown of the Chinese economy with more frequent lockdowns due to Omicron that is weighing down and then also elevated price pressures in many parts of the world or leading central banks to tighten monetary policy controls.
Overall risks to economic prospects have risen sharply and policy trade-offs have become ever more challenging.
“Well, there are a number of important downside risks to our forecast. First, let me start with the war itself. The conflict could escalate, the sanctions could become broader, and this is clearly that would weigh down on economic activity.
“Second, inflation pressures are building up. Some countries, like the US, inflation is at the highest level in 40 years. There is a risk that this could persist and would call for more forceful action by central banks that would weigh down on output and economic activity.
“Third, the COVID 19 pandemic is still with us. We could see the emergence of new variants that are resistant to vaccines that would cause more lockdowns and disrupt global supply chains.
“Fourth, we could have in the context of tightening policy rates around the world, we could also see more financial instability. Many countries might find that capital flows out, currencies could start depreciating. This financial instability is another factor.
“Lastly, we also have the potential for social unrest given the increase in energy and food prices in many countries,” added Gourinchas.
Even as policymakers focus on cushioning the impact of the war and the pandemic, attention will need to be maintained on longer-term goals.
Therefore, the IMF is advising policymakers to first, do everything possible to ensure that the Russia-Ukraine war ends now. Beyond that, the Bretton Woods institution also thinks that there would be the need to think about monetary policy, fiscal policy and health policy.
For monetary policy, central banks need to act decisively to make sure that inflation expectations remain well anchored and not drift away from central bank targets.
At the same time, they need to act in a nimble and data dependent way to support growth and make sure that the hiking cycle that should happen is not going to be disruptive.
On the fiscal side, the IMF also thinks trade off is different, and it is between rebuilding fiscal buffers on the one hand and protecting vulnerable populations that have been hit by the increase in energy and food prices.
“So our advice is first. In countries where the health situation allows, withdraw the support that was put in place in the last two years, then to address vulnerable populations, implement targeted and temporary policies that will help them face higher prices for food and energy.
“This can take different forms, in the form of utility bill discounts, in the form of subsidies for food and energy prices as long as they are temporary and there are clear sunset clauses, and that all of these policies are inscribed in fiscal frameworks, medium term fiscal frameworks so as to ensure fiscal sustainability.
“Finally, on health policy, we need to implement a comprehensive toolkit with monitoring, tests, vaccines and treatments to make sure that all countries can emerge from the COVID 19 pandemic. And this will also require international donors to complete the funding for the international tools that we put in place with funding needs that are around $23.4 billion,” said Gourinchas.
Multilateral efforts to respond to the humanitarian crisis, prevent further economic fragmentation, maintain global liquidity, manage debt distress, tackle climate change, and end the pandemic would also be essential.
