Rising inflation and falling global growth. The International Monetary Fund (IMF) on Tuesday April 19 lowered its global growth forecast to 3.6% for 2022, down 0.8 points from those of January. A revision justified by the war in Ukraine, the sanctions against Russia and the confinements implemented in China to stem the Covid-19 pandemic.
The Washington-based institution also expects inflation to be higher and longer than expected. The war in Ukraine will disrupt supply chains, which have barely recovered from the disorganization of the past two years linked to factory closures, rising sea freight prices and port congestion. These new disturbances will mainly affect the wheat trade (of which Ukraine and Russia provide 30% of the world supply) as corn, and increase the price of raw materials. “The magnitude of these changes depends not only on the drop in exports due to the conflict and sanctions, but also on the elasticity of global supply and demand”analyzes the IMF, which considers that the reserves of other countries can be more easily used for oil than for gas.
Eurozone countries are among the most affected by the economic shock of the war in Ukraine, due to their proximity: consumer prices there are expected to increase by 12.6% in 2022, at levels comparable to those observed in South America or the Middle East, and the increase in GDP there has been revised sharply downwards, to 2.8%, down 1.1 points compared to the January forecasts.
“Seismic Waves”
In comparison, growth in the United States is only revised downwards by 0.3 percentage point, mainly due to a tightening of monetary policy and a drop in activity among its economic partners. “The economic effects of war spread far and wide – like seismic waves that radiate from the epicenter of an earthquake – mainly through commodity markets, trade and financial flows”writes the new chief economist of the IMF Pierre-Olivier Gourinchas, in his introduction to the forecasts.
Tighter financial conditions will highlight vulnerabilities for sovereign and private borrowers, IMF warns
The “seismic waves” can be all the more devastating when the international financial situation is fragile. “The tightening of financial conditions will highlight the vulnerabilities of sovereign and private borrowers”, warns the IMF. The war in Ukraine complicates the work of central banks. If they raise their rates too sharply in the major developed economies, they could trigger a flight of capital from emerging countries, leading to a financial crisis. And they could also harm the recovery of activity.
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