According to a forecast by the International Monetary Fund (IMF), the global economy will grow much more slowly than expected this year due to the war in Ukraine and persistently high inflation. “A tentative recovery in 2021 was followed by increasingly gloomy developments in 2022,” says the new IMF forecast for the global economy.
The prospects are increasingly uncertain, said IMF chief economist Pierre-Olivier Gourinchas on Tuesday. The downside risks would clearly predominate. A “plausible alternative scenario” holds even more pessimistic forecasts, warned Gourinchas.
According to the report, several shocks have hit the economy, which has already been weakened by the pandemic: The recent corona lockdowns in China have led to new problems for global supply chains, the report says.
The effects of the war in Ukraine on the major European economies are also more negative than expected – this is reflected above all in energy prices. In addition, there is unexpectedly high inflation in the USA and the major European economies.
In its new forecast, the IMF only expects global growth of 3.2 percent this year. That is 0.4 percentage points less than assumed in April. The IMF expects growth in the euro zone to be 0.2 percentage points lower at 2.6 percent.
In Germany, gross domestic product (GDP) is only expected to grow by 1.2 percent – a significant downgrade of a forecast from May. At that time, the IMF had forecast growth of around 2 percent for 2023 and 2022. The IMF had already published this latest data for Germany last week.
“Inflation remains stubbornly high,” the current report continues. This year, the IMF is anticipating an inflation rate of 6.6 percent in the industrialized countries, ie 0.9 percentage points more than assumed in April. In emerging and developing countries, the inflation rate is expected to average 9.5 percent, an increase of 0.8 percentage points. Inflation is widely expected to return to near pre-pandemic levels by the end of 2024, the report said.
However, several factors could mean that the momentum does not change and inflation remains high. One factor is shocks in food and energy prices as a result of the Russian war of aggression in Ukraine. This development could encourage stagflation. By stagflation is meant an economy that is no longer growing and prices are rising at the same time.
In this context, the new interest rate decision by the US Federal Reserve on Wednesday is also being eagerly awaited. Fed Chair Jerome Powell had already announced another major rate hike of 0.75 percentage points.
The record inflation had also forced the euro monetary authorities to a higher pace in their first interest rate hike in eleven years. The ECB announced last week that interest rates would rise by 0.50 percentage points. Central banks should stay that way until inflation is contained, said IMF’s Gourinchas
According to the report, the most recent reduction in the IMF’s global economic forecast by 0.4 percentage points is mainly due to the unforeseeable consequences of the war in Ukraine. This could lead to a “sudden stop of European gas imports from Russia”. It could also be more difficult than expected to bring down inflation.
The tighter monetary policy in response to high inflation could result in a debt crisis for emerging and developing countries. These states could repay their loans more difficult due to higher interest rates. Renewed corona outbreaks and the associated supply chain bottlenecks are also a risk factor for the global economy.
The new forecast reflects slowing growth in the world’s three largest economies – the United States, China and the euro area – which is having a significant impact on the global outlook, it said. However, the IMF emphasizes that the forecasts are extremely uncertain.
They are currently based on the assumption that there will be no further unexpected reduction in natural gas supplies from Russia to the rest of Europe. It is also assumed that inflation will remain reasonably stable.
“However, there is a significant risk that some or all of these basic assumptions will not materialize,” warns the IMF. “In a plausible alternative scenario, in which some of these risks materialise, including a complete disruption in Russian gas supplies to Europe, inflation will rise and global growth will further decline to around 2.6 percent this year and 2 percent next year,” he said gourinchas.