IMF cuts global GDP growth to 4.4% in 2022, warns of aggressive Fed tightening
Looking for more evidence that the global economy is rapidly slowing down? Then look no further than the IMF’s latest quarterly World Economic Outlook, which cut its 2022 global economic growth forecast from 4.9% to 4.4% amid the Covid-19 pandemic. 19 enters its third year, citing weaker prospects for the United States and China with persistent inflation. The downgrade was broad-based, with the money fund slashing its GDP forecasts for the US, eurozone, UK, Japan, China and emerging markets. The IMF also lowered its view of world trade from 6.7% to 6.0%.
The United States saw its forecast reduced on the prospects for an implosion of President Joe Biden’s spending program and China, the second largest, on housing challenges. Some additional details:
- The fund cut its US growth forecast by 1.2 percentage points to 4%. The revision reflects the removal of positive impact assumptions from Biden’s Build Back Better social spending plan, which died in Congress; early withdrawal of Federal Reserve support; and persistent supply chain bottlenecks
- The IMF cut China’s growth forecast by 0.8 points to 4.8%, citing disruptions caused by the pandemic, the country’s zero-tolerance policy for Covid-19 and disruptions in the housing sector. .
- The IMF lowered its growth forecasts for Brazil and Mexico by 1.2 percentage points to 0.3% and 2.8%, respectively, as the fight against inflation already prompted a tightening of monetary policy which will weigh on domestic demand
- India to grow fastest among major economies at 9% from 8.5%, due to improving credit growth
Even looking ahead, which is a silly exercise as no one can predict what will happen by the end of 2023, the IMF predicts further slowdown, with global growth falling to 3.8 %, which however represents an increase of 0.2% compared to its previous forecast, but the cumulative expansion for the two years will still be 0.3% lower than the previous forecast.
According to the IMF, the global economy grew 5.9% last year, the strongest in four decades of detailed data. This followed a 3.1% contraction in 2020 that was the worst peacetime decline in broader numbers since the Great Depression.
“The past two years reaffirm that this crisis and the ongoing recovery is unlike any other,” wrote Gita Gopinath, who became the fund’s second head this month after three years as chief economist, in a blog accompanying the report.
“Policymakers need to vigilantly monitor a wide range of incoming economic data, prepare for contingencies, and be ready to communicate and execute near-term policy changes,” Gopinath said. “In parallel, bold and effective international cooperation should ensure that this year is the year the world escapes the grip of the pandemic.”
According to Bloomberg, while the IMF sees the omicron variant weigh on growth in the first quarter, it expects the negative impact to fade from the second quarter, assuming the global surge in infections subsides. and that the virus does not mutate into new variants that require more mobility restrictions.
Supply chain disruptions – which, like inflation, are proving anything but transitory – are driving wider-than-expected inflation, with an annual rate projected to average 3.9% in advanced economies this year, against a previous estimate of 2.3%, and 5.9% in emerging and developing countries.
The good news is that the IMF forecasts a gradual slowdown in inflation later this year, assuming price expectations remain well anchored, as maritime bottlenecks ease and major economies respond in increasing interest rates.
Advanced economies raising interest rates can create risks to financial stability and capital flows, currencies and fiscal positions of emerging and developing economies after debt levels rise, the IMF said. . International cooperation will be needed to preserve nations’ access to liquidity and facilitate orderly debt restructuring if necessary, the fund said.
Projections assume that poor health outcomes from Covid-19 recede to low levels in most countries by the end of this year, vaccination rates improve and treatments become more available. Risks are on the downside, with new variants threatening to prolong the pandemic.
Ending the pandemic depends on ending vaccine inequity, the IMF has said. The share of the population fully immunized is about 70% for high-income countries, but less than 4% for low-income countries. Eighty-six countries, representing 27% of the world’s population, failed to reach the 40% immunization level at the end of last year that the IMF says is needed to stem the pandemic.
Perhaps the most interesting comment came from Gopinath who said any miscommunication of Fed policy changes could cause a flight to safety and trigger an outflow of capital from emerging markets.
How will less accommodative monetary policy in the United States affect global financial conditions? With rising inflation and still significant pent-up demand in the system, in part due to the pandemic stimulus program, US monetary policy will need to tighten. But how far and how fast is still unclear. The WEO forecast is conditional on the end of asset purchases in March 2022 and three rate hikes in 2022 and 2023, in line with what will be needed to bring inflation back to the medium-term target of 2%. But there are upside risks. Inflation could turn out to be higher than expected (if, for example, supply disruptions persist and wage pressures fuel inflation). A different policy will be required if circumstances change. Communicating these changes will be a delicate task and risks provoking strong reactions on the markets which could, in turn, translate into a tightening of the conditions on the financial markets. Market reactions to changes (real or perceived) in Federal Reserve policies will determine how less accommodative policy in the United States will spill over to other countries, especially emerging markets and frontier economies. Any miscommunication or misunderstanding of these changes can cause a flight to safety, increasing spreads for riskier borrowers. This could put undue pressure on emerging market currencies, companies and fiscal positions
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