War in Ukraine and its global spillovers have dealt a severe blow to the global economic recovery and could result in long-term damage, the International Monetary Fund said on Tuesday as it slashed the growth forecasts and lifted the inflation outlook.
In its latest World Economic Outlook report, the lender lowered the global growth forecast for this year to 3.6 percent from 4.4 percent predicted in January.
The projection for next year was cut to 3.6 percent from 3.8 percent.
The downgrade largely reflects the war’s direct impacts on Russia and Ukraine and global spillovers, the IMF said.
Ukraine’s economy is forecast to shrink about 35 percent this year due to the war and the economy is set to suffer long-term damage in terms of loss of life, destruction and migration.
Russia’s economy is also set for a severe contraction of 8.5 percent this year, due to the trade and financial sanctions imposed after the invasion of Ukraine, the IMF said.
“The economic effects of the war are spreading far and wide—like seismic waves that emanate from the epicenter of an earthquake—mainly through commodity markets, trade, and financial linkages,” the WEO said in the foreword to the report.
Supply shortages due to the war are expected to last into 2023 in some sectors, the IMF said as it raised the inflation projections for both advanced and developing economies. The lender expects inflation to remain elevated for longer than expected earlier.
“The risk is rising that inflation expectations drift away from central bank inflation targets, prompting a more aggressive tightening response from policymakers,” IMF Chief Economist Pierre-Olivier Gourinchas warned.
“Furthermore, increases in food and fuel prices may also significantly increase the prospect of social unrest in poorer countries.”
Big central banks such as the U.S. Federal Reserve and the Bank of England have already started raising interest rates, and the European Central Bank has signaled a move in the same direction later this year.
Interest rates are hiked even as consumer price inflation is setting new records in major economies such as Germany as well as in smaller ones, thanks to massive, even three-digit in some cases, increases in energy prices.
Global inflation forecast for this year was raised by 1.8 percentage points to 5.7 percent in advanced economies, and by 2.8 percentage points to 8.7 percent in the emerging market and developing economies.
The latest Global Financial Stability Report, released on Tuesday, cautioned that several emerging market economies could come under pressure if the pace of global monetary tightening accelerates further, especially in the United States.
A more aggressive repricing in the financial markets could further hurt the global outlook, the report added.
Further, debt levels have increased significantly and the war and the impending increase in global interest rates will further reduce fiscal space in many countries, especially oil- and food-importing emerging market and developing economies, the IMF said.
“The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies,” the IMF said.
In the long-term, such a “tectonic shift” could cause long-run efficiency losses, increase volatility and pose challenges to a rules-based framework, the lender stressed.
The U.S. growth forecast for this year was trimmed to 3.7 percent from 4.7 percent. The outlook for next year was lowered to 2.3 percent from 2.6 percent.
The Euro area growth forecast for this year was cut by 1.1 percentage points to 2.8 percent, mainly due to the indirect effects of the war. The projection for next year was trimmed to 2.3 percent from 2.5 percent.
The 2022 growth projections for the big four of Eurozone – Germany, France, Italy and Spain, were cut drastically to 2.1 percent, 2.9 percent, 2.3 percent and 4.8 percent, respectively.
The GDP growth forecasts for Japan and the U.K. for this year were sharply lowered to 2.4 percent and 3.7 percent. Canada’s projection was cut to 3.9 percent from 4.1 percent.
China’s growth forecast for this year was slashed to 4.4 percent from 4.8 percent. The outlook for next year was trimmed to 5.1 percent from 5.2 percent.
India’s outlook for this year was cut to 8.2 percent from 9.0 percent. The projection for next year was slashed to 6.9 percent from 7.1 percent. Despite the downgrade, the country had the fastest growth projections for both years.
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