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IMF warns of ‘multiple challenges’ to global economic recovery

The global economic recovery from coronavirus will run into “multiple challenges” this year, the IMF said on Tuesday, warning of lower growth and higher inflation.

Significantly downgrading its 2022 forecasts for economic activity in the world’s two largest economies, China and the US, the updated economic forecasts from the fund show it becoming more pessimistic about the scope for a full recovery from the pandemic.

The outlook would be even worse, the IMF added, if central banks have to take firmer action to quell inflation or geopolitical tensions in Ukraine intensify.

The IMF’s forecast for the global economy is for growth in gross domestic product to slow from 5.9 per cent in 2021 to 4.4 per cent this year, weakening further in 2023 to only 3.8 per cent.

The fund has knocked 0.5 percentage points off its growth forecast for 2022 with only a modest bounce back of 0.2 percentage points for 2023.

Gita Gopinath, the IMF’s first deputy managing director, said in a blog post that the world economy was grappling with supply disruptions, higher inflation, record debt and uncertainty. “The continuing global recovery faces multiple challenges as the pandemic enters its third year,” she said.

“The last two years reaffirm that this crisis and the ongoing recovery is like no other,” Gopinath added. “Policymakers must vigilantly monitor a broad swath of incoming economic data, prepare for contingencies and be ready to communicate and execute policy changes at short notice.”

The IMF significantly downgraded its forecast for US economic growth in 2022, from 5.2 per cent in its October outlook to 4 per cent just three months later. It judged that the administration of Joe Biden was no longer likely to pass its Build Back Better legislation.

Even with slower growth, the IMF thought the Federal Reserve would need to tighten monetary policy faster than it previously expected.

“Everything points in the same direction when it comes to monetary policy, which is the need to cool down the economy to bring down inflation,” said Gopinath in an interview with the Financial Times.

Ahead of the Fed’s first monetary policy meeting of the year this week, Gopinath said there was likely to be volatility in markets this year. “This makes the job of the Fed even more important — to very, very clearly communicate how they are reading inflation and how they expect to respond to this over time.”

For China, the fund downgraded the 2022 growth outlook from 5.6 per cent to 4.8 per cent on the back of the restrictions needed to continue with its zero-Covid policy and the retrenchment in the property sector.

But Gopinath did not think a Chinese slowdown stemming from its property sector would derail the global economy. “China has both the monetary and fiscal space to deal with the macro consequences of something like that, and does have some ability to ensure that there is some orderly restructuring and that it doesn’t spill over to financially viable firms.”

The IMF also forecast UK growth to moderate after a strong 2022, with the economy expanding 2.3 per cent in 2023.

The eurozone growth outlook was maintained albeit with a weaker recovery forecast, reflecting disruptions from the Omicron wave of Covid-19, followed by faster growth in 2023.

For almost all of the world, inflation is now expected to be higher this year, requiring central banks to tighten monetary policy and putting pressure on countries to make sure their levels of borrowing come down as the cost of credit rises.

This will put most pressure on emerging and developing economies, the fund said, adding to concerns raised earlier this year by the World Bank. Those with large amounts of foreign currency-denominated debt will be most at risk.

Gopinath said the most important economic policy initiative would be “to break the hold of the pandemic”, requiring a larger and more equitable supply of Covid-19 vaccines, tests and therapeutic drugs.

This article was updated on January 25 to make clear the UK economy was forecast to grow by 2.3 per cent in 2023 compared with the year before.


Source: Economy - ft.com

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