Introduction
The World Economic Outlook Update July 2022: Gloomy and More Uncertain underlines the serious effects of the world’s three main economic powerhouses stagnating—the United States, China, and the major European economies. Global growth is expected to drop from 6.1 percent last year to 3.2 percent in 2022, which is 0.4% lower than the last Outlook update in April.
Global financial conditions are tightening with higher-than-expected inflation, particularly in the United States and the main European economies. According to the forecast, less family spending power and a stricter monetary policy will force growth down to 2.3 percent this year and one percent next year in the United States.
China’s downturn has been worse than expected because of the COVID-19 breakouts and lockdowns, and the negative impacts of Russia’s invasion on Ukraine have persisted. Furthermore, additional lockdowns and a worsening real estate crisis in the country have slowed growth to 3.3% this year, the weakest in more than four decades, excluding the pandemic. In the Eurozone, growth has slowed down to 2.6 percent this year and is expected to lower down to 1.2 percent in 2023, reflecting the Ukraine war’s spill overs and tighter monetary policy. “As a result, global output contracted in the second quarter of this year,” stated Mr. Gourinchas.
Inflation
Despite the global downturn, inflation has been revised higher, in part due to increased food and energy prices. This year, it is expected to reach 6.6% in advanced economies and 9.5% in emerging markets and developing economies, reflecting 0.9 and 0.8 percentage point increases, respectively. It is expected to remain high for a longer period of time. According to the IMF official, broader inflation in many economies reflects “the impact of cost pressures from disrupted supply networks and historically tight labour markets.
Risks
The research details some of the hazards ahead, including the possibility that the war in Ukraine could completely cut off European gas supply from Russia; rising prices would generate widespread food poverty and social unrest; and geopolitical fragmentation would inhibit global commerce and collaboration. Inflation may remain stubbornly high if labour markets are unduly tight or inflation forecasts are overly optimistic and prove to be more expensive than projected.
Furthermore, additional COVID-19 breakouts and lockdowns threaten to severely stifle China’s progress. “In a feasible alternative scenario in which some of these risks materialize…inflation would rise and global GDP will slow further to around 2.6 percent this year and 2% next year, a pace that growth has dipped below only five times since 1970,” the IMF analyst added. “Under this scenario, both the US and the Eurozone will have near-zero growth next year, with negative spillover implications for the rest of the globe.”
Inflationary destabilization: According to the prognosis, current inflation levels pose a clear risk to macroeconomic stability. As a result of the scenario, central banks in industrialised nations are withdrawing monetary assistance more quickly than planned, while several in the emerging markets and developing economies began hiking interest rates last year. “The resulting synchronized monetary tightening across countries is historically unprecedented, and its effects are expected to bite, with global growth slowing next year and inflation decelerating,” stated Mr. Gourinchas.
Priorities for policy making
While admitting that a tighter monetary policy would have economic implications, the IMF official maintained that postponing it would only worsen the situation. Furthermore, how and whether debt may be restructured remains uncertain due to problems in coordinating creditor agreements. He stated that domestic policy reacting to the effects of rising energy and food costs should prioritize those most impacted while avoiding pricing distortions.
“Governments should avoid stockpiling food and energy and instead work to remove trade obstacles such as food export prohibitions, which push up global prices,” the IMF official urged. Meanwhile, preventing climate change requires immediate global action to reduce emissions and increase investment to hasten the “green transition.” Policymakers are advised to guarantee that measures are only transitory and address energy shortages and climate policy.
Conclusion
Multilateral collaboration is critical in areas ranging from climate change and pandemic preparation to food security and financial distress, according to the IMF economist. The economist said that amid great challenges and strife, strengthening cooperation remains the best way to improve economic prospects and mitigate the risk of geoeconomic fragmentation.
Written by- Anvesha Tiwari
Edited by – Hrishita Desai