IMF: Global Growth is Slowing, Inflation is Rising
Covid-19's Omicron variant is creating obstacles to the global economy that will slow growth this year, especially the world's two largest economies, the IMF said.
The Washington-based crisis creditor has lowered its global GDP forecast for 2022 to 4.4%, half a point less than the October estimate, due to “obstacles” caused by the latest epidemic, although they are expected to begin to subside in the second quarter of the year.
“The global economy is entering a weaker position in 2022 than previously expected,” the IMF said in a quarterly update of its World Economic Outlook, adding that the emergence of the Omicron option in late November threatens to reverse this uncertain path to recovery.
At the same time, “rising energy prices and supply disruptions have led to higher-than-expected inflation”, which is expected to last longer than expected.
After a solid recovery last year, when the world economy grew by approximately 5.9%, the IMF cut forecasts for almost all countries - with the notable exception of India - but was most affected by lower forecasts for the United States and China.
“These barriers are expected to weigh on growth in the first quarter of 2022,” the report said. “The negative impact is expected to weaken from the second quarter, assuming that the global jump in Omicron infections decreases and the virus does not mutate into new variants that require further mobility restrictions.”
The International Monetary Fund reiterated that controlling the pandemic is crucial for economic prospects, and called for widespread vaccination in developing countries, which are failing to do so, even as developed economies move to boost injections among their already highly vaccinated population.
“Without these global efforts, the virus is more likely to mutate further and expand the global impact of the pandemic,” the fund said.
Slowdown in the US and China
The biggest obstacle to the global outlook is the sharp slowdown in growth in the United States and China, including due to factors unrelated to the virus.
As US President Joe Biden's large-scale social spending plan was halted in Congress, the IMF denied the programme's expected impact on growth. Together with supply chain disruptions affecting US business and manufacturing, these factors have reduced GDP by 1.2 percentage points, which is now expected to grow by 4% this year, the IMF said. Although this is a historically high rate for the world's largest economy, it is far slower than the 5.6 percent expansion in 2021.
Meanwhile, renewed blockades in China have contributed to a slowdown in private consumption, and the fight in the country's real estate sector has cut 0.8 percent of expected growth, which is now projected at 4.8 percent, the report said.
“With the proliferation of the new version of Covid-19, countries have once again imposed restrictions on mobility. Rising energy prices and supply disruptions have led to higher-than-expected inflation, especially in the United States,” the IMF said. “In China, pandemic disruptions related to the policy of zero tolerance for Covid-19 and prolonged financial stress among developers have led to a decline in the score by 0.8 percentage points.”
Other major economies saw their ratings fall sharply amid continuing pandemic disruptions, including a 0.8 percentage point drop for Germany and a 1.2 percentage point drop for Brazil and Mexico. On the other hand, India increased by 0.5 percentage points to 9%, and Japan - a more modest improvement for growth of 3.3%, the IMF said.
The outlook for 2023 has improved somewhat, “but not enough to make up for lost ground due to the downgrade of 2022. The cumulative global growth of 2022 and 2023 is expected to be 0.3 percentage points lower than the previous forecast”.
Inflation is rising, interest rates are rising
The main challenge for the world economy is the sharp rise in prices. The phenomenon is expected to lead to more aggressive action by key central banks such as the US Federal Reserve, whose actions will increase global borrowing costs, hampering recovery efforts, especially in indebted developing countries.
“Increased inflation is forecasted to last longer than expected, with disruptions in the supply chain and high energy prices continuing in 2022,” the IMF said.
If the “pandemic weakens its grip” and energy prices rise moderately, “inflation should gradually decline as the imbalance between supply and demand weakens in 2022 and monetary policy in major economies responds.”
The baseline scenario assumes that the Fed will raise the reference interest rate three times this year and three times in 2023.
Inflation is expected to average 3.9% in developed economies and 5.9% in emerging markets and emerging economies in 2022 before declining in 2023.
The IMF hopes to make “greater progress” soon in negotiations on a new financial assistance program for Argentina, a senior fund official said. “We are working very closely with the Argentine authorities to propose a program ... and we hope to make even more progress in the coming days,” IMF chief economist Gita Gopinat told reporters.
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