Disrupted recoveries, higher rates of inflation, and surging Covid-19 caseloads have combined to put the global economy on the backfoot at the start of 2022, the International Monetary Fund (IMF) has found.
In its latest World Economic Outlook report, published on 25 January, the IMF downgrades its global growth forecast for the year, predicting gross domestic product will weaken to 4.4%, down from 5.9% in 2021. The reduction is half a percentage point lower than the IMF’s previous estimate for 2022, made in October.
The revised outlook is largely attributed to growth forecast markdowns in China and the US; the world’s two largest economies.
China is predicted to grow 4.8% this year – a 0.8 percentage point downgrade from earlier estimates – because of major and ongoing economic disruptions caused by the country’s zero-tolerance Covid-19 policy, and the downturn of its real estate sector.
Meanwhile, the US economy is predicted to grow 4% in 2022, down 1.2 percentage points from the previous forecast in October , as the Federal Reserve continues to wind down its bond-buying stimulus program amid ongoing disruption to supply chains, and Joe Biden’s ‘Build Back Better’ fiscal policy package hits roadblocks on its way through Congress.
“Risks to the global baseline are tilted to the downside,” notes the report. Ongoing supply chain disruption and high energy prices, in addition to increasing inflation, have hampered growth estimates.
Pressure on emerging markets
The outlook for emerging markets with less robust labour markets and economic recovery is more uncertain, according to an IMF blog by Stephan Danninger, Kenneth Kang and Hélène Poirson.
And it is bleaker for countries where cases of the Omicron Covid-19 variant are still surging, such as Brazil, Mexico and Russia, or in areas more directly related to China’s economic slowdown, such as the emerging and developing economies of South East Asia.
Fears of a long and protracted recovery are growing in emerging Asia, where countries that are already vulnerable to the effects of Covid-19 and from their proximity to China are also at risk from growing inflationary pressure and expected interest rate hikes from the US Federal Reserve.
A Reuters article reports that Changyong Rhee, director of the IMF's Asia and Pacific Department, said in a recent interview that “emerging Asia's recovery may be retarded by the higher global interest rates and leverages".
He adds that if US inflation is higher than expected, and the Federal Reserve implements "faster or greater" monetary tightening, then "any miscommunication or misunderstanding of such changes may provoke a flight to safety, raising borrowing costs and resulting in capital outflows from emerging Asia".
The problem of inflation is compounded in many emerging markets by considerably higher levels of public debt. In their blog, Danninger, Kang and Poirson write that average gross government debt in emerging markets is up by almost ten percentage points since 2019, reaching roughly 64% of GDP by the end of 2021, with “large variations across countries”.
The uncertain environment has already led several emerging markets, including Brazil, Russia, and South Africa, to start raising interest rates.
Forward planning
To navigate tighter conditions, Danninger, Kang and Poirson suggest that policymakers in emerging markets tailor responses based on their specific circumstances and vulnerabilities. Whether that involves adjusting monetary policy quickly or more gradually, “responses should include letting currencies depreciate and raising benchmark interest rates”, they write.
Looking further ahead, the IMF has upgraded its global growth forecast for 2023 by 0.2 percentage points, to 3.8%. Although positive, the World Economic Outlook report notes that the upgrade “largely reflects a mechanical pickup after current drags on growth dissipate in the second half of 2022”.
Covid-19 is expected to maintain its grip on the global economy in 2022, with the IMF emphasising the need for more effective global health strategies to curb the pandemic and boost prospects.
While international cooperation is required to increase production, supply, and distribution of vaccines, particularly in the developing world, the IMF report notes that domestic fiscal policies “will need to prioritise health and social spending while focusing support on the worst affected”.
“The emergence of new Covid-19 variants could prolong the pandemic and induce renewed economic disruptions,” it adds.