The IMF, International Monetary Fund has cut down its global economic growth forecast for 2022 from 4.4% to 3.6% GDP. The IMF chief attributes the Russia-Ukraine crisis as a pressure test for the strength of the financial system worldwide (1).
This year, the world was slowly recovering from the pandemic; however, the positive growth trajectory was smashed again due to the crisis, said IMF. The crumbling of natural flows of global trade has slowed down the world economy.
Factors including inflation, supply chain disruptions, fuel prices, and the impact of new COVID variants could further decelerate the growth in Asia, Europe, and the Americas over the next few years.
“The world has been jolted by another huge, transformative shock in only a few weeks. The war has created the real danger that a big part of the recent gains would be reversed,” said Pierre-Olivier Gourinchas, the IMF’s economic adviser and director of research.
“Since our last World Economic Outlook projection in January, global economic prospects have deteriorated dramatically,” Gourinchas added.
According to the IMF, inflation is expected to average 5.7% in developed economies and 8.7% in emerging economies this year, which is 1.8% and 2.8% higher than the January forecast.
Uncertainty Over Russia-Ukraine Crisis
According to the IMF report, the western sanctions imposed on Russia could shrink its economy to 8.5% and 2.3% in the subsequent year (2). Ukraine also suffers from a serious growth reduction, a 35% decrease in its economy in 2022. It could continue to threaten its growth in the upcoming years.
Ukraine’s neighboring countries could also witness adversity. The inflation rate in Germany, at 7.3%, is at a 30-year high as it looks for new ways to end its energy dependency on Russia (3).
“Since Russia’s aggression on Ukraine, natural gas and mineral oil prices have witnessed a significant growth again, taking a toll on the country’s inflation rate,” the office said in a statement.
Likewise, the United Kingdom’s growth has also dropped to 3.6%, and the IMF expects it to fall further in 2023. It also projects the UK to have the highest inflation in Europe. Some energy companies in the UK, including Scottish Power, are urging the government to legislate a “social tariff” to help people offset the inflation (4).
Kevin Anderson, the CEO of ScottishPower, said he wants a “social tariff” that would save disadvantaged consumers £1,000 on their bills. “Even though that would involve lifting the price limit for better-off homes, it is a strategy that may benefit energy corporations.”
The European Central Bank is also under pressure to raise interest rates to combat higher prices.
The US is witnessing a price hike in all major sectors, including food, housing, and energy. More than 81% of the US residents surveyed fear that a recession will hit the country this year (5).
Although jobs are back to pre-pandemic levels, and wages have also increased, the US consumer price index has surged to a 40-year high at over 7%. It could further impact the US’s economic growth.
“When it comes to recoveries, inflation is the boogeyman,” said Robert Frick, corporate economist at Navy Federal Credit Union.
The inflation rates are above 7% in almost half of all emerging economies (6). Consequently, the IMF downgraded the growth rate for Latin America down to 2.4%.
The prices for goods and services are rising at a rapid pace in the LA5, Peru, Mexico, Colombia, Chile, and Brazil. It has pushed central banks to increase interest rates.
While it may be too early to plan for a recession, Americas can take efforts today to improve their financial status. This includes increasing emergency and retirement savings, as well as cutting budgets to keep spending under control in the face of rising inflation.
Things are Also Looking Dire for Asia
Asia has faced large impacts amid the Russia-Ukraine conflict with rising fuel prices and weaker exports demand from Europe.
The IMF expects Japan and India to feel the most significant impact on their growth projections (7).
The International Monetary Fund has degraded the growth of India’s GDP to 8.2% from the previous 9% for the FY 2022-23.
It also predicted that India’s current account deficit in FY23 will be 3.1 percent, up from 1.5 percent in FY22. India’s GDP growth forecast for FY24 was also lowered to 6.9% from 7.1 percent in the IMF’s January report.
According to the IMF, India’s retail inflation is now expected to be 6.1%, higher than the Reserve Bank of India’s projection of 5.7%.
Even at 8.2%, it’s a more optimistic prediction than other agencies, such as the RBI, which trimmed its FY23 forecast to 7.2 percent from 7.8 percent earlier this month (8).
Since India is one of the world’s prominent markets, any slowdown could have a domino effect.
China’s economic growth has dropped to 4.4%, whereas numbers for five APAC countries, including Indonesia and Vietnam, dropped to 5.3%.
Singapore, a trade-reliant nation, is also under threat due to global supply chain disruptions. At the same time, the tight labor market could increase wages and service prices. The Singapore Monetary Authority has predicted inflation to rise above 4.5% to 5.5% in 2022.
Due to the war and the pandemic, inflation has brought serious issues for every nation. Thankfully, most analysts believe that the downward growth trajectory will be subdued by 2024. However, uncertainties around the Russia-Ukraine crisis remain a significant risk factor.