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January 25, 2022   Economic Development

The global economy is entering 2022 in a weaker position than previously expected, the International Monetary Fund (IMF) announced on Tuesday, in an update to their World Economic Outlook (WEO). 

The institution now expects the global economy to expand from a 5.9 per cent increase in 2021 to 4.4 per cent this year. The number is half a percentage point lower than predicted in October, reflecting several changes. 

As the new Omicron COVID-19 variant spreads, many countries have reimposed restrictions on movement, slowing the economic rebound.

Rising energy prices and supply disruptions have also resulted in higher and more broad-based inflation than anticipated, notably in the United States and many emerging market and developing economies.

USA and China

The revision is largely a result of forecast markdowns in the two largest economies, the United States and China.

For the US, the institution is removing the Build Back Better fiscal policy package from their calculations, after the legislation stalled in Congress. It is also accounting for the end of stimulus, and continued supply shortages.

Because of all these factors, the economy should grow 4 per cent this year, less 1.2 percentage-points than initially forecasted. 

In China, the ongoing retrenchment in the real estate sector, slower-than-expected recovery of private consumption, and pandemic-induced disruptions related to the zero-tolerance COVID-19 policy, have induced a 0.8 percentage-point downgrade.

Inflation and 2023

For 2023, IMF is expecting global growth to slow down to 3.8 per cent.

The number is 0.2 percentage points higher than estimated before, reflecting an expected pickup, after current drags on growth dissipate in the second half of 2022.

The forecast assumes that adverse health outcomes will decline to low levels in most countries by the end of the year, assuming vaccination rates improve worldwide, and therapies become more effective.

On the other hand, high inflation is expected to persist for longer than envisioned, with ongoing supply chain disruptions and high energy prices continuing throughout the year.

The indicator should gradually decrease as supply-demand imbalances get corrected along the year and monetary policy in major economies responds.

Risks

In its update, the IMF warns that new variants could prolong the pandemic and induce renewed economic disruptions.

On top of that, supply chain disruptions, energy price volatility, and localized wage pressures mean there is a lot of uncertainty around inflation and policy paths. 

As advanced economies lift policy rates, risks to financial stability and emerging market and developing economies’ capital flows, currencies, and fiscal positions may emerge, especially with the significant increases in debt levels in the past two year. 

Other risks are geopolitical tensions and the ongoing climate emergency, which means that the probability of major natural disasters remains elevated.

Cooperation is key for growth

With the pandemic continuing to maintain its grip, the IMF believes the need for an effective global health strategy is more evident than ever.

Worldwide access to vaccines, tests, and treatments is essential to reduce the risk of further variants. This requires increased production of supplies, better in-country delivery systems, and fairer international distribution.

The Fund believes monetary policy in many countries will need to continue tightening to curb inflation pressures, but fiscal policy will also need to prioritize health and social spending.

In this context, IMF argues that international cooperation will be essential to preserve access to liquidity, and boost orderly national debt restructuring, where needed.