Global growth prospects seem to have worsened significantly due to the combined effects of inflation, Ukraine war and lingering pandemic.
In its latest update the International Monetary Fund (IMF) said there is a significant downgrade to its growth projections for the global economy from 4.4% as of January to 3.6% now.
“There are three main reasons for this downgrade,” IMF’s chief economist Pierre-Olivier Gourinchas noted.
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.
Inflation is higher in most countries and is expected to persist longer.
In addition, there is 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, Gourinchas points out.
The Russian-Ukranian conflict could escalate, the sanctions could become broader, and this is clearly that would weigh down on economic activity.
Inflation pressures are building up. In 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.
The lingering pandemic is another major challenge to the global economy. Covid-19 pandemic is still with us.
Experts say the world might see the emergence of new variants that are resistant to vaccines that would cause more lockdowns and disrupt global supply chains.
In the context of tightening policy rates around the world, more financial instability could be seen.
Many countries might find that capital flows out, currencies could start depreciating. This financial instability is another factor.
“We have also the potential for social unrest given the increase in energy and food prices in many countries,” Gourinchas says.
Clearly, countries around the world are facing tough choices when dealing with the impact of rising inflation, lingering pandemic and historically high debt levels.
The unusually high degree of uncertainty affects all countries differently. Emerging markets and low-income developing countries serving as net importers of energy and food will be especially hit by elevated international prices, putting pressure both on growth and public finances.
In countries where economic growth is less exposed to the conflict and central banks are raising rates to fight high inflation, fiscal policy should move away from the exceptional support provided during the pandemic towards normalisation.
In many emerging markets and low-income developing countries, trade-offs are harsher, IMF noted.
Even as policymakers focus on cushioning the impact of the war and the pandemic, attention will need to be maintained on longer-term goals, experts say.
Therefore, IMF has advised policymakers to do everything they can to end the Ukrainian war now. That will create the room to work on monetary, fiscal and health policies that are required to drive the global economy out of the woods.
