The International Monetary Fund has curtailed global growth projections this week – citing Russia’s continued war in the Ukraine, COVID-19 lockdowns in China and rising inflation as the primary causes.
In the IMF’s latest update, its forecasts have changed, with the outlook worsening “significantly” in the past three months since the last update.
The fund has now pared back growth estimates for 2022 from 4.4% to 3.6%, with 3.6% expected again in 2023.
This is substantial slowdown from growth of around 6.1% in 2021.
After efforts to restore the global economy in the COVID-19 pandemic recovery phase were looking promising, the Russian-Ukraine conflict is beginning to erase any progress.
IMF chief economist and director Pierre-Olivier Gourinchas says the Russia-Ukraine war has flipped the recovering global economy on its head.
“Just as a durable recovery from the pandemic-induced global economic collapse appeared in sight, the war has created the very real prospect that a large part of the recent gains will be erased.”
“The war will slow economy growth and increase inflation,” he said.
Inflation and lockdowns the leading causes of concern
The IMF has sent out a stern warning across the globe that inflation is now a “clear and present danger” for many countries.
The international body now expects the war to further increase inflation highlighting further tightening of western sanctions on Russia’s energy exports would cause another major drop in global output.
Another factor causing the reduced outlook in growth is the surge in COVID-19 lockdowns occurring across China in recent times.
According to the IMF, the war and lockdowns are triggering issues in supply chains throughout the globe, which could result in social unrest with rising prices for food, energy and other commodities.
“Russia is a major supplier of oil, gas, and metals, and together with Ukraine, wheat and corn. Reduced supplies of these commodities have driven their prices up sharply,” Mr Gourinchas explained.
“The surge in fuel and food prices will hurt lower income households globally, including in the Americas and the rest of Asia,” he said.
While cuts to growth are now expected, there still lies a degree of uncertainty in what will unfold.
“Uncertainty around these projections is considerable – well beyond the usual range. Growth could slow down further, while inflation could exceed our projections, for instance if sanctions extend to Russian energy exporters,” Mr Gourinchas said.
“Continued spread of the virus could give rise to more lethal variants that could expose vaccines, prompting new lockdowns and production disruption,” he added.
IMF’s regional growth forecasts
The IMF’s medium turn outlook is revised downwards for all sectors, except commodity exporters which benefit from surges in energy and food prices.
The UK is forecast to be the worst performer in 2023, with expectations the country will expand by just 1.2%. This is despite being a high performer this year among the world’s advanced economies.
These lower forecast for 2023 has been attributed to rising living costs, along with tighter financial conditions, which will lead to a cooling in investments.
The US will suffer the least damage from the war and has had its growth forecast for 2022 shaved by 0.3 points to 3.7%, but the IMF still believes inflation is a cause for concern in the country.
The IMF says among the US and some European countries, “[inflation] has reached its highest levels in more than 40 years, in the context of tight labour markets”.
As a result of western sanctions, Russia is set to be the country facing the biggest impact with the country’s economy expected to shrink 8.5% this year and a further 2.3% in 2023.
This compares to growth of 4.7% in 2021.
Unsurprisingly, Ukraine’s economy will contract by 35% in 2022 and feel the aftereffects of the war for many years to come, according to IMF’s economic outlook.
How Australia looks for the future
As the world’s global growth outlook has been slashed, Australia’s growth forecast has ironically been upgraded.
Australian Federal Treasurer Josh Frydenberg says the IMF has realised the strength of the Australian economy in outperforming all major advanced economies during the pandemic, war in Europe and even the floods at home, in Australia.
The IMF expects Australian economic growth to be 4.2% in 2022, up slightly from a previous forecast of 4.1%.
Despite this, with concerns of surging global inflation, Australia is not out of the woods by any means.
IMF predicts Australia’s inflation will rise to 3.9% in 2022, which is higher than the previous 2.1% estimate – and well above the Reserve Bank of Australia’s 2-3% inflation target.
“Elevated inflation will complicate the trade-offs central banks face between containing price pressures and safe-guarding growth,” the IMF said.