THE International Monetary Fund (IMF) has said that the economic damage occasioned by the Russia-Ukraine war will slow down global recovery from the COVID-19 pandemic, contribute to a significant slowdown in global growth in 2022 and escalate inflation.
According to the body, global growth would slow from an estimated 6.1 per cent in 2021 to 3.6 per cent in 2022 and 2023.
This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than the projection made in January.
These were contained in the April 2022 World Economic Outlook released by the body on Monday.
According to the IMF, “A severe double-digit drop in GDP for Ukraine and a large contraction in Russia are more than likely, along with worldwide spillovers through commodity markets, trade, and financial channels. Even as the war reduces growth, it will add to inflation.”
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The Outlook added that “Fuel and food prices have increased rapidly, with vulnerable populations—particularly in low-income countries—most affected. Elevated inflation will complicate the trade-offs central banks face between containing price pressures and safeguarding growth. Interest rates are expected to rise as central banks tighten policy, exerting pressure on emerging market and developing economies. Moreover, many countries have limited fiscal policy space to cushion the impact of the war on their economies.
“The invasion has contributed to economic fragmentation as a significant number of countries sever commercial ties with Russia and risks derailing the post-pandemic recovery.
It also threatens the rules-based frameworks that have facilitated greater global economic integration and helped lift millions out of poverty. In addition, the conflict adds to the economic strains wrought by the pandemic.”
IMF observed that though many parts of the world were moving past the acute phase of the COVID-19 crisis, deaths remained high, especially among the unvaccinated.
“Moreover, recent lockdowns in key manufacturing and trade hubs in China will likely compound supply disruptions elsewhere.”
According to IMF, “Global growth is projected to slow from an estimated 6.1 per cent in 2021 to 3.6 percent in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than in the January World Economic Outlook Update. Beyond 2023, global growth is forecast to decline to about 3.3 per cent over the medium term.”
The Outlook also stated that inflation would remain elevated for longer than in the previous forecast, driven by war-induced commodity price increases and broadening price pressures.
“For 2022, inflation is projected at 5.7 per cent in advanced economies and 8.7 per cent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected in January. Although a gradual resolution of supply-demand imbalances and a modest pickup in labour supply are expected in the baseline, easing price inflation eventually, uncertainty again surrounds the forecast.
Conditions could significantly deteriorate. Worsening supply-demand imbalances—including those stemming from the war— and further increases in commodity prices could lead to persistently high inflation, rising inflation expectations, and stronger wage growth.
“If signs emerge that inflation will be high over the medium term, central banks will be forced to react faster than currently anticipated—raising interest rates and exposing debt vulnerabilities, particularly in emerging markets.
“The war in Ukraine has exacerbated two difficult policy trade-offs: between tackling inflation and safeguarding the recovery; and between supporting the vulnerable and rebuilding fiscal buffers.”
IMF then advocated tighter monetary policy to check the cycle of higher prices driving up wages and inflation expectations, and wages and inflation expectations driving up prices.
It stated, “In countries where the harmful effects from the war are larger, the trade-off between safeguarding growth and containing inflation will be more challenging. Central banks should remain vigilant to the impact of price pressures on inflation expectations and continue to communicate clearly on the outlook for inflation and monetary policy.
A well-telegraphed, data-dependent approach to adjusting forward guidance on the monetary stance—including the unwinding of record-high central bank balance sheets and the path for policy rates—is the key to maintaining the credibility of policy frameworks.
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