IMF warns of weakening global recovery

Date : 28 February 2022

IMF’s latest update to finance ministers of the G20 warns that the global economic recovery from COVID-19 is expected to slow, due to inflation across developed markets and future uncertainty around the development of the pandemic.

Risks threaten global recovery

Whilst recovery across developed economies was strong in 2021, the global economy is entering a difficult stage. The update predicted that the delayed economic pain of COVID-19 is likely to come to fruition over 2022.

The COVID-19 pandemic is receding across the majority of developed states, thanks to a successful vaccine rollout and the reduced severity of the Omicron variant. However, a large number of economies still have low vaccination rates, thus increasing the risk of dangerous new variants emerging.

Supply-side inflation is the key concern for the majority of developed economies, risking future global growth. The IMF has revised down its global growth forecasts for 2022 by 0.5% from 4.9% to 4.4%. The IMF update revised down UK growth projections for 2022 by 0.3% to 4.7%.

Global bottlenecks across the supply chain, increases in energy and food prices and supply-demand mismatches are driving inflation to higher-than-expected levels across the G20. Inflation drivers and impacts vary between countries and within countries. There is consistency in that the greatest impact will be felt by the most vulnerable households.

The labour market conditions currently impacting UK food and drink companies is not an isolated issue, conditions have tightened considerably within advanced economies. The poor participation of the older working population in the UK is cited as a persistent issue, whilst skill shortages and inclusion are driving labour issues elsewhere.

Policy outcomes

The update sated that monetary and fiscal policies need to be carefully balanced and flexible in order to control inflationary pressure, whilst limiting impacts to growth from inevitable interest rate rises.

IMF gave support for the tightening of monetary policy expected from the Bank of England over 2022. Fiscal deficits are required to shrink, with the focus shifting to driving sustainable growth; however, policymakers should remain flexible to the nature of the recovery and emergent risks.

This information was provided prior to the dramatic escalation of the crisis in Ukraine over recent days. The effects of which is likely to exacerbate many of the issues the IMF presented. The crisis is expected to drive further inflation in global food and energy prices.

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