The International Monetary Fund has cut its growth forecasts for the next 18 months after warning that the world’s three largest economies are stagnating and that inflation is higher than expected.
In a downbeat update to its World Economic Outlook (WEO) in April, the IMF said problems in the US, China and the euro zone had caused global output to fall in the second quarter of this year, the first contraction since the start of Covid-19. 19 pandemic.
The Washington-based IMF said it now expects the global economy to grow 3.2 percent in 2022, down 0.4 points from April. The slowdown is expected to continue next year, when growth is now forecast at 2.9%, 0.7 points lower than forecast three months ago.
The UK is forecast to grow by 3.2% in 2022 and just 0.5% in 2023 – cuts of 0.5 and 0.7 points. The IMF expects the UK to contract significantly in the second half of this year and to be the weakest of the G7 economies in 2023.
“The global economy, still reeling from the pandemic and Russia’s invasion of Ukraine, faces an increasingly bleak and uncertain outlook,” said IMF Economic Adviser Pierre- Olivier Gourinchas.
“Higher-than-expected inflation, particularly in the United States and major European economies, is leading to a tightening of global financial conditions. China’s slowdown has been worse than expected amid Covid-19 outbreaks and lockdowns, and there have been more negative spillovers from the war in Ukraine.”
The IMF said for the fourth quarter of 2022 it expected global inflation to be 8.3%, up from its April estimate of 6.9%. He identified the UK, where inflation is set to be 2.7 points higher, at 10.5%, and the euro zone (2.9 points, to 7.3%) as places where the pressures of the cost of living have particularly intensified.
A breakdown of the revised WEO forecasts showed that in 2022 growth declined by 0.8 points in the US, 0.9 points in Germany and 1.1 points in China. In 2023, all the world’s major economies except Nigeria and Saudi Arabia, both oil-exporting countries, are expected to grow more slowly.
Only Japan and Canada among the group of major industrial nations are forecast to grow by more than 1% next year, and the IMF forecasts 1% expansion in the US and France, 0.8% in Germany and 0.7% in Italy.
Gourinchas said there were a number of downside risks to the global economy that could lead to even weaker performance. These include:
A sudden stop to European gas flows from Russia as a result of the war in Ukraine.
Stubbornly high inflation.
A debt crisis caused by the most restrictive global financial conditions.
More Covid-19 outbreaks and lockdowns in China.
Social unrest caused by rising food and energy prices.
Trade wars and geopolitical fragmentation.
“In a plausible alternative scenario where some of these risks materialize, including a complete shutdown of Russian gas flows to Europe, inflation will rise and global growth will slow further to 2.6% this year and 2% next year, a rate that growth has fallen. below just five times since 1970,” Gourinchas said.
“In this scenario, both the United States and the euro area see almost zero growth next year, with negative knock-on effects for the rest of the world.”
Sign up for the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk
The IMF’s economic adviser said the fight against inflation should be the top priority for policymakers and backed the central bank’s recent decisions to raise interest rates.
“Tighter monetary policy will inevitably have real economic costs, but delaying it will only make matters worse. Central banks that have started to tighten should stay the course until inflation is tamed.”
Governments could cushion the impact of the slowdown on the most vulnerable through targeted support, Gourinchas said, but the aid would have to be paid for with higher taxes or lower public spending to ensure the work of central banks does not it becomes more difficult.