IMF Cuts Global Growth Projection To 3.6% On Worsening Inflation, Others
Owing to the worsening global growth prospects occasioned by the combined effects of inflation, the war in Ukraine and lingering pandemic, the IMF Tuesday announced a downgrade of its growth projection from 4.4 per cent to 3.6 per cent.
The cut is 0.8 per cent from the 4.4 per cent global growth projections of January to 3.6 per cent in its latest update announced on April 19.
The impacts of the three critical are outlined in the World Economic Outlook report, released at the beginning of the Spring Meetings of the IMF and World Bank in Washington, DC by new chief economist, Pierre-Olivier Gourinchas.
“Well, there is a significant downgrade to our growth projections for the global economy from 4.4 per cent as of January to 3.6 per cent in our latest update. 0.8 percentage point difference.
There are three main reasons for the downgrade of which the first is the war invasion of Ukraine by Russia, which is increasing energy and commodity prices around the world and is leading to less output and more inflation that is expected to persist longer in most countries that are higher.
Second is the slowdown of the Chinese economy with more frequent lockdowns due to Omicron that is weighing down and then also, the elevated price pressures in many parts of the world or, leading central banks to tighten monetary policy controls according to Gourinchas, IMF’s Chief Economist.
Overall risks to economic prospects have risen sharply and policy trade-offs have become ever more challenging.
“Well, there are several important downside risks to our forecast. First, let me start with the war itself. The conflict could escalate, the sanctions could become broader, and this would weigh down on economic activity.
Second, inflation pressures are building up. In some countries, like the US, inflation is at the highest level in 40 years. There is a risk that this could persist and would call for more forceful action by central banks that would weigh down on output and economic activity.
Inflation in Nigeria shot up to 15.92 per cent in March, the fastest in five months, rising from 15.7 per cent in February.
Third, the COVID 19 pandemic is still with us. We could see the emergence of new variants that are resistant to vaccines that would cause more lockdowns and disrupt global supply chains. Fourth, we could have in the context of tightening policy rates around the world, we could see also more financial instability.
Many countries might find that capital flows out, and currencies could start depreciating. This financial instability is another factor. Lastly, we have also the potential for social unrest given the increase in energy and food prices in many countries,” added Gourinchas.
For policymakers to be able to cushion the impact of the war and the pandemic, they will need to pay longer-term attention.
“Well, our advice to policymakers is first, do everything we can to end the war now. Beyond that, we can think about monetary policy, fiscal policy and health policy.
For monetary policy, Gourinchas said central banks need to act decisively to make sure that inflation expectations remain well-anchored and not drift away from central bank targets.
“At the same time, they need to act in a nimble and data-dependent way to support growth and make sure that the hiking cycle that should happen is not going to be disruptive”.
On fiscal policy, he noted that the trade-off is different and It’s between rebuilding fiscal buffers on the one hand and protecting vulnerable populations that have been hit by the increase in energy and food prices.
“So our advice is first. In countries where the health situation allows, withdraw the support that was put in place in the last two years, then address vulnerable populations, and implement targeted and temporary policies that will help them face higher prices for food and energy.
He said the targeted policies can take different forms like utility bill discounts, subsidies for food and energy prices as long as they are temporary and there are clear sunset clauses, and that all of these policies are inscribed in fiscal frameworks, medium-term fiscal frameworks to ensure fiscal sustainability.
Finally, on health policy, he urged the implementation of a comprehensive toolkit with monitoring, tests, vaccines and treatments to make sure that all countries can emerge from the COVID 19 pandemic.
This, Gourinchas said will require international donors to complete the funding for the international tools which requires about $23.4 billion.
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