‘Seismic waves’: IMF cuts global growth forecast over Russia war

The International Monetary Fund slashed its forecast for global economic growth by nearly a full percentage point citing Russia’s war in Ukraine, and warned inflation was now a “clear and present danger” for many countries.

The war is expected to further increase inflation, the IMF said on Tuesday in its latest World Economic Outlook, warning a further tightening of Western sanctions on Russia to target energy exports would cause another major drop in global output.

The IMF said other risks include a sharper-than-expected deceleration in China prompted by a flare-up of COVID-19 lockdowns.

Rising prices for food, energy and other goods could trigger social unrest, particularly in vulnerable developing countries, the IMF said.

Reduced supplies of oil, gas and metals produced by Russia, and wheat and corn – produced by both Russia and Ukraine – drove up prices sharply in Europe, the Caucasus and Central Asia, the Middle East and North Africa, and sub-Saharan Africa, but was hurting lower-income households around the world.

Downgrading its forecasts for the second time this year, the global crisis lender said it now projected global growth of 3.6 percent in both 2022 and 2023, a drop of 0.8 and 0.2 percentage point, respectively, from its January forecast because of the war’s direct effects on Russia and Ukraine and global spillovers.

“What has Russia’s invasion of Ukraine cost? A crisis on top of a crisis with devastating human costs and a massive setback for the global economy,” IMF Managing Director Kristalina told a food security panel on Tuesday.

‘Seismic’ war impacts

The IMF has estimated Ukraine’s GDP will collapse by 35 percent this year, while Russia’s output will shrink by 8.5 percent in 2022.

But IMF Chief Economist Pierre-Olivier Gourinchas told a news briefing a tightening of sanctions against Russia to include restrictions on energy exports could double Russia’s GDP decline to 17 percent by 2023.

Spillovers from higher energy prices, a loss of confidence, and financial market turmoil would cut another two percentage points off of global growth forecasts, Gourinchas said.

The war, which Russia has described as a “special military operation“, has caused a humanitarian crisis in Eastern Europe, displacing about five million Ukrainians to neighbouring countries, the IMF said.

The war has exacerbated inflation that already had been rising in many countries because of imbalances in supply and demand linked to the coronavirus pandemic, with the latest lockdowns in China likely to cause new bottlenecks in global supply chains.

“The war adds to the series of supply shocks that have struck the global economy in recent years. Like seismic waves, its effects will propagate far and wide – through commodity markets, trade, and financial linkages,” Gourinchas said.

Central banks face increased pressure to fight inflation with tighter monetary policy, and a further tightening of sanctions could accelerate this move, which could cause more difficulties for developing economies, added Gourinchas.

‘Clear and present danger’

The IMF said inflation was now projected to remain higher for longer, driven by war-induced commodity price increases and broadening price pressures, and it warned the situation could get worse if supply-demand imbalances deepened.

For 2022, it forecast inflation of 5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies, a jump of 1.8 and 2.8 percentage points from January’s forecast.

“Inflation has become a clear and present danger for many countries,” Gourinchas said.

The Russia-Ukraine war also increased the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies – a move Gourinchas said would be a “disaster”.