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IMF cuts economic growth outlook for 2022

January 25, 2022

The dimmer outlook reflects faltering growth in the world’s largest economies, the United States and China. Signaling tough times ahead for households and policymakers, the IMF expects elevated price levels to persist.

Los Angeles port
Global supply chain bottlenecks have been caused by a lack of containers and other factorsImage: Damian Dovarganes/AP/picture alliance

The global economy has stepped into 2022 in a weaker position than previously expected, held back by the spread of the omicron variant of the coronavirus, rising energy prices and persistent supply disruptions, the International Monetary Fund (IMF) said in its latest edition of the World Economic Outlook on Tuesday.

The fund expects global growth to slow down to 4.4% this year from nearly 6% in 2021. The half a percentage point cut in the 2022 growth outlook — the IMF forecast in October the global output would expand by 4.9% this year — is a result of dimmer economic prospects in the United States and China, the world's largest economies.

"In the case of the United States, this reflects lower prospects of legislating the Build Back Better fiscal package, an earlier withdrawal of extraordinary monetary accommodation and continued supply disruptions," Gita Gopinath, first deputy managing director of the IMF, said in a blog. "China's downgrade reflects continued retrenchment of the real estate sector and a weaker-than-expected recovery in private consumption."

The IMF also downgraded Germany's 2022 growth outlook by 0.8 percentage points to 3.8% as supply-chain bottlenecks continue to disrupt post-pandemic economic recovery in the export-reliant economy.

Supply disruptions have played a key role in stalling global recovery this year. Shipping snarls as well as a shipping container shortage, and a steep post-pandemic rebound in demand, have left producers, including German carmakers, struggling to source components and raw materials.

Global supply chain snarls to last into 2022

High inflation to linger

The chaos gripping global supply chains has been instrumental in propping up inflation globally, particularly in developed economies such as the United States and Germany. Inflation has been further pushed up by rising fossil fuel prices, which have almost doubled in the past year, and soaring food prices, particularly in sub-Saharan Africa.

The IMF raised its 2022 inflation forecasts for both advanced and emerging markets and developing economies, saying it expects elevated price levels to persist. It now expects inflation to average 3.9% in advanced economies and 5.9% in emerging markets and developing economies in 2022, before subsiding next year.

The soaring inflation has prompted several central banks to tighten the money taps to rein in the price rise. The US Federal Reserve is expected to hike its key interest rates as early as March. A Fed rate hike could spell trouble for some emerging economies, including South Africa, Argentina and Turkey, which could see a flight of capital.

"It is key to communicate well the policy transition towards a tightening stance to ensure orderly market reaction. Where core inflationary pressures remain subdued, and recoveries incomplete, monetary policy can remain accommodative," Gopinath said. "Emerging market and developing economies with large foreign currency borrowing and external financing needs should prepare for possible turbulence in financial markets by extending debt maturities as feasible and containing currency mismatches."

Divergent recoveries persist

The IMF said the global output in 2023 would grow 3.8%, a little faster than previously forecast as "the shocks dragging 2022 growth will dissipate."

Reiterating its earlier warning, the fund said the recoveries would continue to be unequal. While developed economies are forecast to return to the pre-pandemic trend this year, several emerging markets and developing economies are expected to take longer to get there.

Gopinath noted that the pandemic had set back the progress in poverty reduction by several years, with the number of people living in extreme poverty in 2021 estimated to be have been about 70 million higher than pre-pandemic trends.

"With policy space diminished in many economies, and strong recoveries underway in others, fiscal deficits in most countries are projected to shrink this year," she said. "The fiscal priority should continue to be the health sector, and transfers, where needed, should be effectively targeted to the worst-affected."

Among factors that pose risks to its outlook, the IMF mentioned the emergence of deadlier coronavirus variants, China's zero-COVID strategy, which could worsen supply disruptions, the highly indebted real estate sector in China, and aggressive monetary tightening by the Federal Reserve.

Edited by: Hardy Graupner

Ashutosh Pandey
Ashutosh Pandey Business editor with a focus on international trade, financial markets and the energy sector.@ashutoshpande85