Economy

IMF cuts global growth forecast due to "seismic waves" from Russia's war in Ukraine; LatAm's projections improved slightly

The global lender, which downgraded its forecasts for the second time this year, said it now projects global growth of 3.6% in 2022 and 2023, a drop of 0.8 and 0.2 percentage point from its January forecast, given the war’s direct impacts on Russia and Ukraine and global spillovers. For LatAm, the forecast has changed to 2.5% in 2022 (better than the 2.4% forecast of January) and also to 2.5% in 2023 (slightly worse than the 2.6% scenario of three months ago).

IMF Mexico
The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S., September 4, 2018. Photo: REUTERS/Yuri Gripas/File Photo
  • Further sanctions on Russian energy and a widening of the war, a sharper-than-forecast deceleration in China, and a renewed flare-up of the pandemic could further slow growth and boost inflation, while rising prices could trigger social unrest;
  • The war has exacerbated inflation that already had been rising in many countries due to imbalances in supply and demand linked to the pandemic, with the latest lockdowns in China likely to cause new bottlenecks in global supply chains;
  • For LatAm, the forecast has changed to 2.5% in 2022 (better than the 2.4% forecast in January) and also to 2.5% in 2023 (slightly worse than the 2.6% scenario of three months ago).

The International Monetary Fund slashed its forecast for global economic growth by nearly a full percentage point, citing Russia’s war in Ukraine and warning that inflation was now a “clear and present danger” for many countries. The war is expected to slow growth and further increase inflation; the IMF said in its latest World Economic Outlook while warning that its forecast was marked by “unusually high uncertainty.” However, for Latin America and the Caribbean, the projections improved slightly compared to January’s analysis when it comes to 2022.

Further sanctions on Russian energy and a widening of the war, a sharper-than-forecast deceleration in China, and a renewed flare-up of the pandemic could further slow growth and boost inflation. At the same time, rising prices could trigger social unrest.

READ ALSO: Analysis: Rising inflation in Latin America means more ‘monetary pills’ ahead

The global lender, which downgraded its forecasts for the second time this year, said it now projects global growth of 3.6% in 2022 and 2023, a drop of 0.8 and 0.2 percentage point from its January forecast, given the war’s direct impacts on Russia and Ukraine and global spillovers. For LatAm, the forecast has changed to 2.5% in 2022 (better than the 2.4% forecast in January) and also to 2.5% in 2023 (slightly worse than the 2.6% scenario of three months ago).

Brazil is projected to grow 0.8% in 2022 (0.5 percentage point above the January forecast) and 1.4% in 2023 (0.2 point below the previous projection). Mexico is supposed to see its economy growing 2% and 2.5% this year and the next (a less optimistic vision compared to 2.8% and 2.7% of the January scenario).

Medium-term global growth is expected to decline to about 3.3% over the medium-term, compared to an average of 4.1% in the period from 2004 to 2013 and an expansion of 6.1% in 2021.

The war has exacerbated inflation that already had been rising in many countries due to imbalances in supply and demand linked to the pandemic, with the latest lockdowns in China likely to cause new bottlenecks in global supply chains.

READ ALSO: Hawkish Fed and China lockdowns threaten the world’s best-performing currency so far this year, the Brazilian real

The war, which Russia describes as a “special military operation” has caused a tragic humanitarian crisis in Eastern Europe, displacing some 5 million Ukrainians to neighboring countries, the IMF said.

“The war adds to the series of supply shocks that have struck the global economy in recent years. Like seismic waves, its effects will propagate far and wide — through commodity markets, trade, and financial linkages,” IMF chief economist Pierre-Olivier Gourinchas said in a blog post.

For 2022, it forecast inflation of 5.7% in advanced economies and 8.7% in emerging market and developing economies, a jump of 1.8 and 2.8 percentage points from January’s forecast. “Inflation has become a clear and present danger for many countries,” Gourinchas wrote in the blog.

READ ALSO: Chile announces $3.7 billion recovery plan to aid struggling economy

He said the U.S. Federal Reserve and many other central banks had already moved toward tightening monetary policy, but war-related disruptions were amplifying those pressures.

The war had also increased the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies.

“Such a ‘tectonic shift’ would cause long-run efficiency losses, increase volatility and represent a major challenge to the rules-based framework that has governed international and economic relations for the last 75 years,” Gourinchas said.

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