The International Monetary Fund (IMF) on Tuesday slashed global growth forecast for 2022 to 3.6 percent amid the Russia-Ukraine conflict, 0.8 percentage points lower than the January projection, according to its newly released World Economic Outlook report.
The Ukraine crisis unfolds while the global economy is "on a mending path" but has not yet fully recovered from the COVID-19 pandemic, the report said, noting that global economic prospects have worsened "significantly" since the forecast in January.
A severe double-digit drop in gross domestic product (GDP) for Ukraine and a large contraction in Russia are "more than likely," along with worldwide spillovers through commodity markets, trade and financial channels, the report showed.
This year's growth outlook for the European Union has been revised downward by 1.1 percentage points to 2.8 percent due to the indirect effects of the conflict, making it a large contributor to the overall downward revision, according to the report.
The U.S. economy is on track to grow 3.7 percent in 2022, 0.3 percentage points lower than the January projection, before growth moderating to 2.3 percent in 2023. The Chinese economy is expected to grow 4.4 percent this year, 0.4 percentage points lower than the previous projection, followed by a 5.1-percent growth in 2023, the report showed.
China's National Bureau of Statistics said on Monday the country's GDP grew 4.8 percent year on year in the first quarter, marking a steady start in 2022 in the face of global challenges and a resurgence of COVID-19 cases.
Analysts said the full-year growth target of 5.5 percent set by China's policymakers is still attainable but requires greater efforts, given increasing economic headwinds.
Global growth is projected to decline from an estimated 6.1 percent in 2021 to 3.6 percent in both 2022 and 2023, 0.8 and 0.2 percentage points lower for 2022 and 2023, respectively, than in the January projection, the report noted.
The report laid out five principal forces shaping the near-term global outlook: the Russia-Ukraine conflict, monetary tightening and financial market volatility, fiscal withdrawal, slowing growth in China, and pandemic and vaccine access.
Inflation has become "a clear and present danger" for many countries, IMF chief economist Pierre-Olivier Gourinchas said at a virtual press conference during the 2022 spring meetings of the IMF and the World Bank.
He said even prior to the Russia-Ukraine conflict, inflation surged on the back of soaring commodity prices and supply-demand imbalances, and many central banks, such as the U.S. Federal Reserve, had already moved toward tightening monetary policy.
Conflict-related disruptions "amplify those pressures," said Gourinchas. "We now project inflation will remain elevated for much longer."
For 2022, inflation is projected at 5.7 percent in advanced economies and 8.7 percent in emerging markets and developing economies, 1.8 and 2.8 percentage points higher than the January projection, the report showed.
Financial conditions tightened for emerging markets and developing countries immediately after the conflict, Gourinchas noted. "Several financial fragility risks remain, raising the prospect of a sharp tightening of global financial conditions as well as capital outflows," he said.
On the fiscal side, policy space was already eroded in many countries by the pandemic, said the IMF chief economist. "The surge in commodity prices and the increase in global interest rates will further reduce fiscal space, especially for oil- and food-importing emerging markets and developing economies."
The report also warned that the conflict increases 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.
In response to a question from Xinhua, the IMF chief economist said at the press conference that the multilateral organization thinks fragmentation "is more of a longer run risk than a short run risk."
"We are not anticipating that there will be immediately severe dislocation, but you could see countries sort of de-globalizing or reverting and undoing some of the gains from trade integration," Gourinchas said. "And that's certainly a source of worry for us."
The IMF urged central banks to adjust their policies decisively to ensure that medium- and long-term inflation expectations remain anchored, noting that clear communication and forward guidance on the outlook for monetary policy will be "essential" to minimize the risk of disruptive adjustments.
Several economies will need to consolidate their fiscal balances, the report noted, adding that this should not impede governments from providing well-targeted support for vulnerable populations, especially in light of high energy and food prices.
"Embedding such efforts in a medium-term framework with a clear, credible path for stabilizing public debt can help create room to deliver the needed support," according to the report.
Gourinchas also argued that even as policymakers focus on cushioning the impact of the war and the pandemic, other goals will require their attention, noting that the most immediate priority is to end the war.
He also urged countries to close the gap between stated ambitions and policy actions on fighting climate change, secure equitable worldwide access to the full complement of COVID-19 tools to contain the virus, as well as ensure that the global financial safety net operates effectively.
"The many challenges we face call for commensurate and concerted policy actions at the national and multilateral levels to prevent even worse outcomes and improve economic prospects for all," he added.
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