In its latest World Economic Outlook report, IMF has downgraded its global GDP growth projection for 2022 by 0.8% to 3.6%. The projection for 2023 has also been reduced, slightly.
Inflation and the global recovery
Since the January edition, the war in Ukraine has had a dramatic effect on the global economy, causing energy price shocks and food price rises. Some countries have also imposed economic sanctions on Russia and Belarus.
Global inflationary pressure is now expected to peak higher and persist for longer than previously forecast. European countries are some of the most impacted and prices are expected to rise by 12.6% over 2022 and a further 7.5% over 2023.
All members of the G7 have had their growth forecasts cut to varying degrees, from 0.3% in the United States to 1.7% in Germany (Germany’s economy is linked very closely to Russia’s).
Of the total 0.8% deduction in the global growth forecast, over 0.3% of the contribution is due to the impact on the Russian economy from Western sanctions. The Russian economy is now expected to contract by 8.5% over 2022.
As IGD has previously discussed, Ukraine and Russia are large producers of specific commodities such as natural gas, grain and sunflower oil. Certain countries are far more exposed to the price shocks in these goods.
Turkey, a significant importer of gas and wheat from Russia and Ukraine, is now expected to see average inflation of over 60% over 2022. This experience is reflected across parts of the developing world. The world food price index hit record levels over March, raising significant concerns of civil unrest.
UK economic weakness
The update paints a gloomy picture for the UK economy. GDP growth has been revised down 1% to 3.7%, this is 0.1% below the recent OBR forecast. Growth of only 1.2% over 2023 is expected.
Inflation is expected to average 7.4% over 2022. The impact inflation is expected to have on real disposable incomes is likely to cool consumer demand across the UK.
A key determinant of future growth prospects and inflation levels will be the base interest rate set by the Bank of England.
Previously, to temper significant demand-side inflation, policy makers have had to maintain high rates for a considerable length of time. Given the fragility of the UK economy, it is unclear whether the Bank will be able to do this without negatively impacting growth.
The UK’s labour market issues have again been highlighted by IMF as an ongoing concern. A skills mismatch to the vacancies available, health related concerns driving older workers out of the workforce, a change in job preferences and continued education disruption is driving vacancies to record highs.
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