IMF lowers forecast / Global economy suffers a severe setback

The International Monetary Fund warns that the many crises in the world will dampen global economic growth in the long term. The war in Ukraine, but also the lockdowns in China, lead to a significantly lower forecast.

The International Monetary Fund warns that the many crises in the world will dampen global economic growth in the long term. The war in Ukraine, but also the lockdowns in China, lead to a significantly lower forecast.

The International Monetary Fund (IMF) lowers its forecast for the global economy because of the war in Ukraine. “Overall, the economic risks have increased significantly,” said IMF chief economist Pierre-Olivier Gourinchas on Tuesday.

The world economy had not yet fully recovered from the corona pandemic before the Russian attack on Ukraine. “The outlook for the global economy has suffered a severe setback, largely due to Russia’s invasion of Ukraine,” said Pierre-Olivier Gourinchas.

In Europe in particular, the IMF now expects lower growth rates and severe recessions in Russia and Ukraine. The war is also likely to fuel already high inflation.

For Germany, the IMF expects growth of 2.1 percent for 2022 – this is the lowest rate of all European countries analyzed by the IMF. For 2023, growth in Germany is expected to increase to 2.7 percent, while France and Italy will grow much more slowly.

Federal Finance Minister Christian Lindner described the International Monetary Fund’s (IMF) lowered economic forecast as a result of the Ukraine war as a “further warning signal”. “Low growth combined with rising inflation is a dangerous combination,” said the FDP politician in Berlin on Tuesday. Economically, there is no “simple business as usual”.

Germany is particularly affected in Europe

Nevertheless, the economists at the IMF do not see a recession in Europe. However, this does not mean that the situation in the German economy will ease. “There are many risk factors for growth in Europe,” says Gourinchas. For example, inflationary pressure is increasing, there is still a risk that the ECB will take tougher action on interest rate policy, and Europeans are less willing to buy.

Countries that are particularly dependent on Russian energy supplies, such as Germany and Italy, also face a higher risk that growth could slow.

With forecast growth of 2.1 percent in Germany and 2.3 percent in Italy, both countries are well below the global average. The IMF expects the global economy to grow by 3.6 percent in both 2022 and 2023. In 2021 it was 6.1 percent.

Compared to the estimates in January, the IMF lowered its forecast for 2022 by a whopping 0.8 points and for 2023 by 0.2. The West had previously imposed extensive sanctions on Russia, and further measures such as an oil boycott are being discussed.

Russia’s economy is likely to shrink further

Russia’s economy is likely to collapse by 8.5 percent in 2022 and shrink again by 2.3 percent in 2023. In 2021 it had increased by 4.7 percent. A recession of at least 10 percent is expected for Ukraine this year.

Russia plays a leading role internationally, especially in energy and raw materials, such as oil, gas and metals. Like Ukraine, Russia is also a major exporter of wheat and grain. Because of the war and the sanctions, prices are already rising significantly, which according to the IMF will primarily affect poorer countries.

“Inflation has become a present danger”

Many countries should actually reduce their debt, which has skyrocketed during the pandemic, but at the same time mobilize funds for refugees and help poor households with high food and energy prices.

Contrary to what was initially thought, inflation is proving to be much more persistent. The IMF expects a rate of 5.7 percent in industrialized countries and 8.7 percent in emerging and developing countries this year. The situation has thus deteriorated significantly since January – and the IMF does not rule out the possibility that it could deteriorate significantly again.

The central banks now have to tighten their loose monetary policy for a long time. “Inflation has become a clear and present threat for many countries,” said IMF economist Gourinchas. In the USA and some European countries it is at its highest level for more than 40 years.

There is no threat of a second oil crisis

However, the economist does not want to draw parallels to the oil crisis in the 1970s. “Many compare the current crisis with the 1970s, but there are differences,” he said at the press conference.

Measured against the inflation rate, oil prices rose much faster in the 1970s than they do now, and most countries are now much more diversified in their energy sources than they were 50 years ago. A lack of collective agreements in many countries also means that workers’ wages do not automatically rise with inflation. Nevertheless, inflation must be taken seriously, stressed Gourinchas.

The frequent and severe corona lockdowns in Chinese metropolises such as Shanghai are also slowing down the global economy. This could increase the supply chain problems of many companies. For China – the second largest economy in the world after the USA – the IMF predicts growth rates of only 4.4 and 5.1 percent this year and next. For comparison: in 2021 it was still 8.1 percent.