IMF Sounds Alarm On ‘Significant Slowdown’ As Ukraine War And Inflation Slam Global Economies

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Topline

The International Monetary Fund warned on Tuesday that global economic growth will be “severely set back” by the fallout from Russia’s war with Ukraine, the effects of which will be felt “far and wide” as the conflict adds to global pricing pressures and fuels inflation.

“Global economic prospects have been severely set back,” the IMF said.

Peter Dejong/ASSOCIATED PRESS

Key Facts

The IMF issued a “significant downgrade” to growth projections in its latest World Economic Outlook, predicting global GDP will grow 3.6% in 2022—a marked downgrade from the 4.4% estimated in January and the world’s 6.1% GDP growth in 2021.

The IMF became the latest to predict a “significant slowdown” in global growth this year, as the economic damage from Russia’s invasion of Ukraine has far-reaching consequences around the world.

IMF chief economist Pierre-Olivier Gourinchas warns that disruptions to Russian oil and gas as well as Ukrainian wheat and corn will continue to hit commodities markets “like seismic waves.”

The main reason for the downgrade, according to Gourinchas, is that economic damage from the war in Ukraine will continue to hurt global output and “add to inflation,” especially as fuel and food prices have increased rapidly.

He describes inflation as a “clear and present danger” that is expected to persist for longer in many countries, warning that central banks “need to act decisively” to hike interest rates but make sure that doing so doesn’t hurt economic growth.

Downside risks to global economic growth remain plentiful: Beyond the war in Ukraine and persistent inflation, the coronavirus pandemic continues to present a challenge, while the IMF also warned of potential “financial instability” and “social unrest” amid all the uncertainty.

Crucial Quote:

“Economic damage from the [Ukraine] conflict will contribute to a significant slowdown in global growth in 2022 and add to inflation,” Gourinchas said. “The effects of the war will propagate far and wide, adding to price pressures and exacerbating significant policy challenges.”

What To Watch For:

The IMF isn’t alone in slashing global economic growth forecasts over the last few weeks. Experts at the Peterson Institute for International Economics, a think tank based out of Washington D.C., recently predicted global GDP to decline to 3.3% in 2022 and 2023. The World Bank, meanwhile, has also issued similar warnings, lowering its 2022 GDP forecast to 3.2% from 4.1%.

Tangent:

A host of Wall Street firms are similarly warning that corporations are expected to feel the brunt of inflation as they report earnings and warn of increased pricing pressures. Analysts at Morgan Stanley predict that quarterly earnings are likely to take a hit as rising costs due to inflation dent margins and hurt consumer spending, while Goldman Sachs strategists recently put the odds of a recession within the next two years at 35%.