The International Monetary Fund cut its growth forecasts for the next 18 months after warning that the world’s three largest economies were stagnant and inflation was higher than previously forecast.
In a negative update to its April World Economic Outlook (WEO), the IMF said problems in the US, China and the eurozone led to a decline in global output in the second quarter of this year – the first contraction since the start of the Covid-19 pandemic.
The Washington-based IMF said it now expects the global economy to grow by 3.2% in 2022, down 0.4 points from April. The slowdown is set to continue into 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 – down from 0.5 and 0.7 points. The IMF expects the UK to slow significantly in the second half of this year and be the weakest of the G7 economies in 2023.
“The global economy, still struggling with the pandemic and the Russian invasion of Ukraine, faces an increasingly bleak and uncertain outlook,” IMF economic adviser Pierre-Olivier Gurincha said.
“Higher-than-expected inflation, particularly in the United States and major European economies, is causing global financial conditions to tighten. China’s slowdown has been worse than expected amid Covid-19 outbreaks and lockdowns, and there were additional negative effects from the war in Ukraine.”
The IMF said it forecast global inflation at 8.3 percent by the fourth quarter of 2022, up from its April estimate of 6.9 percent. It identified the UK – where inflation is now on track to be 2.7 points higher to 10.5% – and the eurozone (up 2.9 points to 7.3%) as places where spending pressures life has intensified especially.
A breakdown of the WEO’s revised forecasts showed a decline in growth in 2022 of 0.8 points in the US, 0.9 points in Germany and 1.1 points for China. In 2023, all major world economies except Nigeria and Saudi Arabia – both oil exporters – are expected to grow more slowly.
Only Japan and Canada among the major industrial nations are expected to grow by more than 1% next year, with the IMF forecasting expansions of 1% in the US and France, 0.8% in Germany and 0.7% in Italy.
Gurinchas said there are a number of downside risks to the global economy that could lead to an even weaker performance. They include:
Sudden stoppage of European gas flows from Russia as a result of the war in Ukraine.
Persistently high inflation.
A debt crisis triggered by tighter 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 would rise and global growth would slow further to around 2.6% this year and 2% next year – a rate at which growth has fallen below just five times since 1970,” Gurinchas said.
“Under this scenario, both the United States and the eurozone will experience almost zero growth next year, with negative spillovers for the rest of the world.”
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The IMF’s economic adviser said fighting inflation should be a 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 the difficulties worse.” Central banks that have started to tighten should stay the course until inflation is tamed.
Governments could soften the impact of the slowdown on the most vulnerable through targeted support, Gurinchas said, but aid must be paid for through higher taxes or lower public spending to ensure central banks’ work is not hampered .
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