The International Monetary Fund cut its global growth projections for 2022 and 2023 on Tuesday, calling the global economic outlook “gloomier and more uncertain.”
The IMF now expects the global economy to grow 3.2% this year, before slowing further to a rate of 2.9% of GDP in 2023. The revisions mark a downgrade of 0.4 and 0.7 percentage points, respectively, with respect to their April projections.
The Washington-based institute said the revised outlook indicated that the downside risks outlined in its previous report were materializing. Among these challenges are rising global inflation, a worse-than-expected slowdown in China and the fallout from the war in Ukraine.
“A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022,” the report said.
“Several upheavals have hit a world economy already weakened by the pandemic: higher-than-expected inflation around the world, especially in the United States and major European economies, leading to tighter financial conditions; a worse-than-expected slowdown in China, reflecting the outbreaks of COVID19 and lockdowns; and further negative spillovers from the war in Ukraine,” he added.
The projected slowdown would mark the first quarterly contraction in global real GDP since 2020. A “plausible” but less likely alternative scenario could see global growth fall to around 2.6% in 2022 and 2.0% in 2023, said the IMF, which puts global growth in the bottom 10% of results since 1970.
The World Bank last month cut its global growth outlook for 2022 to 2.9 percent from a previous estimate of 4.1 percent, citing similar macroeconomic pressures.
The USA, China and India lead the declines
Worsening growth prospects in the US, China and India prompted the IMF’s downward revisions.
The outlook for US GDP was cut 1.4 percentage points to 2.3%, driven by weaker-than-expected growth in the first half of 2022, lower household purchasing power and tightening of monetary policy.
China’s economy was seen growing 1.1 percentage points below previous estimates, following prolonged Covid lockdowns and a deepening housing crisis. The world’s second-largest economy is now expected to grow by 3.3% in 2022, its lowest level in four decades, barring the initial fallout from the Covid-19 crisis in 2020.
The IMF cut its global growth outlook in July due to rising global inflation, a worse-than-expected slowdown in China and the fallout from the war in Ukraine, which is fueling a food and energy crisis.
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India’s forecast was cut by 0.8 percentage points to 7.4%, largely due to less favorable external conditions and faster policy tightening.
Meanwhile, the euro zone outlook was cut by 0.2 percentage points to 2.6%, even as the IMF said the biggest fallout from the Ukraine war was likely to rise in 2023, particularly in the main economies of Germany, France and Spain.
Russia’s economy contracted less than expected in the second quarter despite wide-ranging economic sanctions over its unprovoked invasion of Ukraine, the IMF said. Its projection for 2022 was revised upwards by 2.5 percentage points, although its estimated growth rate remains negative at -6.0%.
Global inflation continues to rise
It comes as inflation continues to rise until 2022, led by rising food and energy prices.
Global inflation is forecast to reach 6.6% in advanced economies and 9.5% in emerging and developing economies this year, an upward revision of 0.9 and 0.8 percentage points, respectively .
With rising prices fueling a global cost-of-living crisis, the IMF said taming inflation should be policymakers’ number one priority.
“Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them,” he said.
He added that policies to address higher energy and fuel prices should focus on the most vulnerable groups without distorting overall prices.
For months, central banks have been gradually adopting a stricter monetary policy. Last week, the European Central Bank joined the US Federal Reserve and the Bank of England in raising interest rates, the first such move in 11 years.
Still, inflation has remained persistent, hitting 40-year highs in the US and UK last month.