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IMF cuts global growth forecast to 3.6% as Ukraine war hits neighbours hard

The global economy will take a hit this year from growth and higher inflation as a result of Russia’s invasion of Ukraine, the IMF said on Tuesday.

In its World Economic Outlook, the fund said the outlook had “deteriorated significantly”, with countries closest to the war likely to be hit the hardest. But it warned that risks had increased everywhere, increasing the likelihood of even lower growth and faster price increases, overturning the fund’s view that there would be a stronger recovery from the pandemic this year.

The IMF’s forecasts showed global gross domestic product growth this year of 3.6 percent, down 0.8 percentage points since the fund’s January projections and 1.3 percentage points lower than six months ago. In 2021, global growth was estimated at 6.1 percent, the fund said.

In a simulation exercise, the IMF warned that an immediate oil and gas embargo against Russia would further increase inflation, hit European and emerging economies hard and require even higher interest rates, including in the US.

Pierre-Olivier Gourinchas, the IMF’s new chief economist, told the Financial Times that “we are facing a slowdown in growth [and] faced with increased inflation”, although he liked to avoid the word “stagflation”, which means a prolonged period of low economic expansion and rapidly rising prices.

Bar chart of GDP growth in 2022 (%) lowering the IMF's economic growth forecasts

“The idea of ​​stagflation comes with some baggage, and I want to be a little careful about whether we really want to put ourselves in a 1970s stagflation frame of mind,” he said.

Gourinchas has not downplayed the issue of high inflation this year, which has heavily highlighted the fund in its forecasts.

Compared to the October forecast of 3.5 percent in 2022 in the US, it now assumes 7.7 percent. Average inflation in the eurozone has increased from 1.7 percent to 5.3 percent.

With the projected rise in US inflation and a relatively moderate economic blow from the conflict in Ukraine, the IMF advised the Federal Reserve to continue raising interest rates quickly. But the war would likely have a greater impact on European growth, complicating monetary policy response.

The European Central Bank was in a “much less comfortable position” than the Fed, Gourinchas said.

Bar chart of consumer price increase in 2022 (%, selected countries) showing that the IMF now expects much higher and more persistent inflation

“The signals in the US are consistent that something needs to be done about inflation, and because the economy is strong, there’s room to do that without necessarily going into recession territory. The ECB is facing a situation where, if it starts to tackle inflation, it will exacerbate the decline in aggregate demand. That is never a good situation to be in as a policy maker.”

The IMF predicted a 35 percent GDP collapse in Ukraine as it suffered from the destruction of its infrastructure and mass emigration, while sanctions and pariah status would lead to an 8.5 percent drop in Russia’s GDP.

If Europe and the US move forward with sanctions, they could add to the economic pain for Russia, the IMF said in its scenario examining the effects of an oil and gas embargo.

This could cut 15 percent of Russia’s economic output by 2027, hurting President Vladimir Putin’s regime, but would also entail significant costs, especially for European economies. The IMF estimated that the EU would lose 3 percent of output by 2023, while global inflation would rise by more than a percentage point this year and next.

IMF chief economist Pierre-Olivier Gourinchas

IMF chief economist Pierre-Olivier Gourinchas did not downplay the issue of high inflation, which has marked the fund heavily in his forecasts © David Paul Morris/Bloomberg

There was “relatively little” that could be done to mitigate the effects of an embargo in the short term, Gourinchas said.

As for the necessary investment to increase significantly alternative gas supplyhe said “we’re not talking six months, we’re probably not talking a year,” adding that there would still be a “significant shortage” even with coal or nuclear supplements.

Given limited alternatives, “there should be some adjustment” [to] energy consumption within the EU, and there will also be some price adjustments”.

Emerging economies would perform even worse than advanced economies in 2022 and 2023, the IMF said, as most commodity importers were hit harder by higher prices for energy and food imports.

But the good news was that there had been no significant capital flight from developing countries so far since the Fed announced it plans to tighten monetary policy significantly this year. “We didn’t have a tantrum. We haven’t had any capital flows flowing out of emerging markets,” Gourinchas said.

Growth in emerging economies is expected to recover in 2023 as prices stabilize, but forecasts were still weaker than those in January.

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