Global economy suffers severe setback, inflation in US, Europe at its highest level in over 40 years – IMF

Admin l Wednesday, April 20, 2022

 

LAGOS, Nigeria – The International Monetary Fund, IMF has lamented that that the global economic outlook has suffered severe setback and that inflation is now a clear and present danger in many countries worldwide.

The IMF which spoke at a press conference in Washington by its team said that inflation in the United States and many European countries is currently at its highest level in over 40 years as a result of the invasion of Ukraine by Russia.

The IMF team is composed of Pierre‑Olivier Gourinchas, Economic Counselor and Director of the Research Department, IMF; Petya Koeva Brooks, Deputy Director, Research Department, IMF; Malhar Nabar, Division Chief, Research Department, IMF and Nadya Saber, Senior Communications Officer, IMF.

“Global economic prospects have been severely set back, largely because of Russia’s invasion of Ukraine. This crisis unfolds as the global economy has not yet fully recovered from the pandemic.

“Even before the war, inflation in many countries had been rising due to supply‑demand imbalances and policy support during the pandemic, prompting a tightening of monetary policy. The latest lockdowns in China could cause new bottlenecks in supply chains. In this context, beyond its immediate and tragic humanitarian impact, the war will slow economic growth and increase inflation. Overall economic risks have risen sharply, and policy trade‑offs have become even more challenging”, Pierre‑Olivier Gourinchas, Economic Counselor and Director of the Research Department, IMF said.

He added: “Compared to our January forecast, we have revised our projection for global growth downwards to 3.6 percent in both 2022 and 2023. This reflects the direct impact of the war in Ukraine and sanctions on Russia, with both countries projected to experience steep contractions. The growth outlook for the European Union has been revised downward by 1.1 percentage points due to the indirect effects of the war, making it the second largest contributor to the overall downward revision”, he said, adding that the  war adds to the series of supply shocks that have struck the global economy in recent years.

He explained that like seismic waves, its effect will propagate far and wide through commodity markets, trade, and financial linkages.

“Russia is a major supplier of oil, gas, and metals, and, together with Ukraine, of wheat and corn. Reduced supplies of these commodities have driven their prices up sharply. Commodity importers in Europe, the Caucasus and Central Asia, the Middle East, north Africa, and sub‑Saharan Africa are most affected. But the surge in food and fuel prices will hurt lower‑income households globally, including in the Americas and the rest of Asia.

“Eastern Europe and Central Asia have large direct trade and remittance links with Russia and are expected to suffer. The displacement of about 5 million Ukrainian people to neighboring countries, especially Poland, Romania, Moldova, and Hungary, adds to the economic pressures in the region”, he said.

According to him, the medium‑term outlook is revised downwards for all groups, except commodity exporters, who benefit from the surge in energy and food prices.

According to him, aggregate output for advanced economies will take longer to recover to its prepandemic trend and  that the divergence that opened up in 2021 between advanced and emerging markets and developing economies is expected to persist, suggesting some permanent scarring from the pandemic.

“Inflation has become a clear and present danger for many countries. Even prior to the war, it surged on the back of soaring commodity prices and supply‑demand imbalances. Many central banks, such as the Federal Reserve, had already moved toward tightening monetary policy. War‑related disruptions amplify those pressures.

“We now project inflation will remain elevated for much longer. In the United States and some European countries, it has reached its highest level in more than 40 years in the context of tight labor markets. The risk is rising that inflation expectations drift away from central bank inflation targets, prompting a more aggressive tightening response from policymakers”, he explained.

He noted that increases in food and fuel prices may also significantly increase the prospect of social unrest in poorer countries.

“Immediately after the invasion, financial conditions tightened for emerging markets and developing countries. So far, this re-pricing has been mostly orderly; yet several fragility risks remain, raising the prospect of a sharp tightening of global financial conditions, as well as capital outflows.

“On the fiscal side, policy space was already eroded in many countries by the pandemic. The withdrawal of extraordinary fiscal support was projected to continue. The surge in commodity prices and the increase in global interest rates will further reduce fiscal space, especially for oil‑ and food‑importing emerging markets and developing economies.

“The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocs with distinct technology standards, cross‑border payment systems, and reserve currencies.

“Such a tectonic shift would cause long‑run efficiency losses, increase volatility, and represent a major challenge to the rules‑based framework that has governed international and economic relations for the last 75 years. Uncertainty around these projections is considerable, well beyond the usual range. Growth could slow down further, while inflation could exceed our projections if, for instance, sanctions extend to Russian energy exports”, the IMF warned.

In this difficult environment, he explained, national‑level policies and multilateral efforts will play an important role and that Central banks will need to adjust their policies decisively to ensure that medium‑ and long‑term inflation expectations remain anchored.

“ Clear communication and forward guidance on the outlook for monetary policy will be essential to minimize the risk of disruptive adjustments. Several economies will need to consolidate their fiscal balances. This should not impede governments from providing well‑targeted support for vulnerable populations, especially in light of high energy and food prices. Embedding such efforts in a medium‑term framework with a clear, credible path for stabilizing public debt can help create room to deliver the needed support”, he said.

According to him, as policymakers focus on cushioning the impact of the war and the pandemic, other goals will require their attention and that the most immediate priority is to end the war.

He said that particular attention should also be paid to the overall stability of the global economic order to make sure that the multilateral framework that has lifted hundreds of millions out of poverty is not dismantled. These risks and policies interact in complex ways over varying time frames.

“Rising interest rates and the need to protect vulnerable populations against high food and energy prices make it more difficult to maintain fiscal sustainability”, he said.

Gourinchas said the U.K. is facing elevated inflation pressures and has started tightening its monetary policy, adding that the development is one of the factors that is going to weigh down on economic activity, both this year and the next.

“We are projecting this year the U.K. economy to grow by about 3.7, which is a downward revision of about 1. And the main reason for that is just the major supply shock that the economy is facing. That said, I should also say that we have had larger revisions in a number of countries in Europe, notably, Germany as well as Italy”, he said.

He explained that there is an ongoing trend of deglobalisation which will  not help global economy.

“We see this as a serious risk. Of course, there could be questions of energy security, and there could be questions of national security. But beyond that, the body of evidence that we have indicates that countries are able to grow faster, are able to increase their standards of living to higher levels when they are benefiting from being inserted into the global economy and when they can be plugged into global supply chains that are quite diversified and resilient.

“So a move toward more fragmentation would undo many of these gains and would potentially lead to efficiency losses and reduced standards of living or not allow them to grow as quickly as what we have seen in the past”, he said.

The IMF chief said the increase in food and energy price is one of the drivers here of potentially the rise in social unrest.

“We have been calling for urgent and coordinated action on the food crisis, together with the World Bank, the World Food Programme, and other international organizations. We are really urging the international community to do all it can to provide funding and to provide food supplies to vulnerable populations around the world”, he explained.

He said that 86 percent of the global economy revising down  and that Nigeria is one of the few that is actually revised up.

“And there are two main factors. One is what you mentioned, the increased oil price, which represents a favorable terms of trade effect for Nigeria, will increase oil production, oil exports. And then the second factor is momentum, the strong momentum that we saw in the non‑oil sector, part of the economy. And I think this was what the question was about, that we missed here. But I think that is what you were asking about. The non‑oil sector of the economy is also showing strong momentum going into the year, which helped lift the outcome growth forecast that we have for Nigeria to 3.4 percent for this year and to 3.1 percent for next year. And that is a 0.7 percentage point increase for this year and a 0.4 percentage point increase for next year”, he said.