IMF Warns Economic Recovery Will Be Worse Than Expected After U.S. Inflation Surge And China Covid Disruptions

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Topline

The International Monetary Fund on Tuesday warned the global economy is in a weaker position entering this year than previously expected due largely to the ongoing disruptions spurred by the pandemic—including rapid inflation, persistent Covid-induced lockdowns and supply chain constraints—in the U.S. and China, the world’s two largest economies.

Gasoline prices are displayed at a Marathon station in Miami Beach, Fla.

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Key Facts

In its biannual World Economic Outlook report published Tuesday, the IMF said global growth is expected to fall from 5.9% in 2021 to 4.4% this year—half a percentage point lower than its forecast in October—and 3.8% in 2023.

The organization blamed the lagging growth prospects on rising energy prices and supply chain disruptions that have resulted in higher-than-anticipated inflation—notably in the U.S. and many emerging markets.

Fueling the overall decline, the IMF downgraded its U.S. economic growth projections from 5.2% to 4%, citing supply shortages, the Federal Reserve’s removal of pandemic-era stimulus and the nearly diminished likelihood that President Joe Biden will pass his $1.2 trillion social spending package, dubbed Build Back Better.

In China, an embattled real estate sector and a zero-tolerance Covid policy have induced a 0.8 percentage point downgrade, from 5.6% to 4.8%.

“The most pressing health risk” is still the impact of the omicron variant, the researchers warned, adding that low vaccination rates in many countries risk further new variants that could spur additional mobility restrictions, which could pull growth forecasts down further.

IMF Deputy Managing Director Gita Gopinath estimated the total economic losses stemming from the pandemic at nearly $13.8 trillion—roughly equivalent to the annual gross domestic product in China, the world’s second-largest economy.

Crucial Quote

“The last two years reaffirm that this crisis and the ongoing recovery is like no other,” Gopinath said Tuesday.

Key Background

The omicron variant has quickly swept through the world since it was first reported to the World Health Organization in November, resulting in tighter Covid restrictions, unexpected job loss and climbing inflation rates that are already at decades-long highs in many countries. “The future path of the pandemic remains highly uncertain, but the underlying job market narrative overall continues to be one of scarcity of available applicants and workers,” Bankrate analyst Mark Hamrick said last week, adding that “the latest wrinkle—the high level of individuals testing positive, becoming ill or staying away from work—has added to supply-chain disruptions with inflation already running red-hot.”

What To Watch For

As stocks sink in anticipation of the Fed’s looming interest rate hikes, the IMF says such market reactions will govern how less-accommodating policy in the United States spills over to other countries, and particularly emerging markets. “Any miscommunication or misunderstanding of such changes may provoke a flight to safety, raising spreads for riskier borrowers and putting undue pressure on emerging market currencies, firms, and fiscal positions,” the organization said.