Global Economy To Suffer Amid Synchronised Monetary Implications: IMF Report

The International Monetary Fund (IMF) released a revised World Economic Outlook (WEO) in July 2022, lowering its projections for global economic growth. According to the most recent projections, the expansion of global production would drop to 3.2% in 2022 and 2.9% in 2023, an almost 50% decrease from 2021’s 6.1% expansion. As a whole, growth projections have been lowered across the board, but they have been revised down significantly for the advanced countries, where they have gone from 5.2% to 2.5% to 1.4%. Growth in EMDEs, on the other hand, will decelerate from 6.8% to 3.6% before recovering somewhat to 3.9% throughout the timeframe.

There are a number of causes behind the lowering of expected world growth. It is noted that the worldwide production dropped in the April-June quarter of 2022, mostly because of slumps in China and Russia. Another factor is weaker-than-expected US consumer spending, which has implications for both internal and foreign demand. The higher-than-expected inflation in developed countries, notably the United States and Europe, is another issue that has prompted a reevaluation of growth forecasts. War in Ukraine-induced uncertainty also had a role.

One contradiction that jumps out at us is that although predictions for global economic growth have been lowered, inflation expectations have been raised. Consumer price inflation is forecast to rise to 6.6% in developed countries and 9.5% in EMDEs by 2022 due to rising food and energy costs and demand-supply mismatches. While inflation in developed countries is forecast to fall to 3.3% in 2023, it is projected to remain at a significantly higher 7.3% in EMDEs.

The significant decline in international commerce of goods and services is a key constraint on economic expansion. Since the predicted increase in the amount of trade in goods and services is expected to drop by more than half to 4.1% in 2022 and then to 3.2% in 2023. The outlook is particularly bleak for the EMDEs, where the expansion of trade in goods and services is anticipated to plunge to about one-fifth the 2021 rates in 2022, before recovering modestly to 3.3% in 2023. The precipitous slowing and subsequent collapse in commodity prices may be traced back to the dramatic reduction in the amount of international commerce. While the growth in oil prices is forecast to slow to 50.4% in 2022 and further decrease in 2023, the decrease in the prices of non-fuel goods is anticipated to be considerably more rapid. As a big oil importer, India stands to benefit greatly from these developments.

In addition, the research highlights certain additional dangers. One way in which a European conflict drags on might negatively impact energy markets is if it leads to a shortage of supplies. Also, inflation management might be jeopardised if inflation expectations are anchored, and a restrictive monetary policy stance could slow GDP for much longer. Similar to how the tightening of global financial markets might threaten the external sector stability of several EMDEs.

What’s fascinating is how the pandemic’s effects and the EMDEs’ ability to regain lost ground in terms of productivity vary so widely. The economies of Latin America and the Caribbean were struck particularly hard by the epidemic, with a fall in production that was around three times higher than the EMDE average. However, the EMDEs in Europe, sub-Saharan Africa, and Asia had less of a slowdown in production growth than the average EMDE. Asia, however, saw the strongest recovery of any region in 2021, followed by Latin America and the Caribbean, Europe, and sub-Saharan Africa. But projections for the next two years imply that production in Europe will likely remain flat or perhaps drop. While growth in Asia will fall to a third of its former levels, Latin America and the Caribbean will see growth decrease by just a third of its current rates. Only in sub-Saharan Africa is steady growth anticipated.

There are significant discrepancies in economic recovery amongst countries. The outlook is not promising for India, one of the countries most impacted by the epidemic, with GDP falling to -6.6% in 2020 and rebounding to 8.7% in 2021, the third highest growth among the large economies. The only other countries with double-digit growth rates were Argentina and Türkiye. The IMF has lowered India’s growth prediction from 7.4% in 2022 to 6.1% in 2023, yet even with these reductions, India still tops the list. The research attributes the anticipated downturn in GDP to unfavourable external factors and quick monetary policy tightening.

As for the present mess of sluggish growth and increasing prices, the IMF’s recommendations are puzzling. Focusing on price stability via tightening monetary policy is a top objective. Also, it cautions that, although this will undoubtedly have a substantial economic impact, any delay in the process would simply worsen it. However, it proposes a disinflationary approach on both the fiscal and monetary fronts, which will have a disproportionately negative impact on economically weak populations. Even worse, the IMF is ignoring the pressing need to provide additional foreign currency resources to nations hit by the tightening of global financial conditions, which has generated debt distress in countries like Sri Lanka.