IMF: Raises global economic growth bar to 3.6% over Ukraine

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The International Monetary Fund (IMF) has revised its forecasts for global economic growth by almost one percentage point due to Russia’s war in Ukraine, warning that inflation is now a “clear and present threat” to many countries. ”.

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The war is expected to slow growth and increase inflation even further, the IMF said in its latest report on the world economy, while noting that its forecast is characterized by “unusually high uncertainty”.

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According to the Fund, further sanctions on Russia’s energy sector and the escalation of the war, a larger-than-expected slowdown in China and a pandemic resurgence could further slow growth and boost inflation, while further prices could trigger social unrest.

The IMF, which downgraded its forecasts for the second time this year, now estimates that the global economy will grow at a rate of 3.6% in 2022 and 2023, cutting its forecasts by 0.8% and 0.2% respectively in January. , due to the direct effects of the war in Russia and Ukraine but also its international effects.

In the medium term, global growth is expected to decline to around 3.3%, compared to an average of 4.1% in the period from 2004 to 2013, and growth by 6.1% in 2021.

“The outlook for the global economy has deteriorated significantly, mainly due to the Russian invasion of Ukraine,” IMF chief economist Pierre-Olivier Gurensa wrote on the Fund’s blog on Tuesday following the release of the latest global economy report.

At the same time, the Fund says the war has exacerbated inflation that has already risen in many countries due to supply and demand imbalances due to pandemic problems, adding that recent lockdowns in China are likely to cause new problems in global chains. supply.

The “seismic vibrations” of war will reach everywhere

The war, according to the IMF, has caused a tragic humanitarian crisis in Eastern Europe, as it has caused the displacement of about 5 million Ukrainians in neighboring countries.

At the same time, he stressed that both Russia and Ukraine are expected to experience a sharp contraction of their economies, while for the European Union – which is highly dependent on the Russian energy sector – estimates that the growth rate for 2022 will slow down. by 1.1%.

In particular, for Russia, the Fund estimates that the country’s GDP will shrink by 8.5% this year, while if further sanctions are imposed on the Russian energy sector by the West, Gurensa estimates that the fall in GDP in 2023 could reach 17%.

“The sanctions that have already been imposed have a very significant impact on the Russian economy and it could be further strengthened if the sanctions are intensified,” he said.

“War is adding to the series of shock supplies that have hit the world economy in recent years. Like seismic vibrations, their effects will reach everywhere – through commodity markets, trade and financial transactions,” Gurensa said.

Reduced supplies of oil, gas and minerals produced in Russia, as well as wheat and corn – produced by both Russia and Ukraine – have led to significant price increases in Europe, the Caucasus and Central Asia, and the Middle East. and North Africa, as well as sub-Saharan Africa, but it also affects low-income households around the world.

The IMF says it has revised all its medium-term estimates for all sectors except exporters of goods benefiting from rising energy and food prices.

The Fund estimates that developed economies will need more time for their GDP to return to pre-pandemic levels, while the gap between developed and emerging economies is expected to persist for some time, suggesting that the pandemic will leave some “permanent scars”.

Inflation

In terms of inflation, the IMF estimates that it will remain high for longer due to rising commodity prices as a result of the war, and warned that the situation could worsen if the supply-demand imbalance widens. .

For 2022, the IMF estimates that inflation will be 5.7% in developed economies and 8.7% in emerging and developing countries, up 1.8% and 2.8% respectively Fund forecasts in January.

Gurensa stressed that the US Federal Reserve and many other central banks have already begun tightening their monetary policies, but the turmoil caused by the war has intensified inflationary pressures.

The Fund even warned that inflation forecasts could be derailed, leading to even more aggressive monetary tightening policies, which could put pressure on a wide range of emerging economies.

Finally, the IMF stresses that the war has increased the risk of more permanent fragmentation of the world economy into geopolitical blocs with different technological standards, cross-border payment systems and reserve currencies.

“Such a ‘tectonic shift’ could cause long-term loss of efficiency, increase volatility and pose a major challenge to the regulatory framework of international and economic relations over the last seven years,” Gurensa said.

Source: Capital

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