The global economy will suffer a hit to growth and higher inflation this year as a result of Russia’s invasion of Ukraine, the IMF said on Tuesday.
In its World Economic Outlook, the fund said prospects had “worsened significantly” with countries closest to the war likely to be hardest hit. But it warned that risks had intensified everywhere, raising the chances of even lower growth and more rapid price rises, and upending the fund’s view that there would be a stronger recovery from the pandemic this year.
The IMF’s forecasts showed global growth of gross domestic product this year of 3.6 per cent, down 0.8 percentage points since the fund’s January projections and 1.3 percentage points lower compared with six months ago. In 2021, global growth was estimated at 6.1 per cent, the fund said.
In a simulation exercise, the IMF warned an immediate oil and gas embargo against Russia would raise inflation further, hit European and emerging economies hard and require even higher interest rates, including in the US.
Pierre-Olivier Gourinchas, the IMF’s new chief economist, told the Financial Times that “we’re facing a slowdown in growth [and] facing elevated inflation”, although he was keen to avoid the word “stagflation”, meaning a prolonged period of low economic expansion and rapidly rising prices.
“The notion of stagflation comes with some baggage, and I want to be a little bit careful about whether we really want to put ourselves in a frame of mind of the stagflation of the 1970s,” he said.
Gourinchas did not downplay the problem of high inflation this year, which the fund has marked up severely in its forecasts.
Compared with its October forecast of US inflation of 3.5 per cent in 2022, it now expects 7.7 per cent. The eurozone average inflation rate has been revised up from 1.7 per cent to 5.3 per cent.
With the forecast rise in US inflation set alongside a relatively moderate economic hit from the Ukraine conflict, the IMF recommended the Federal Reserve continue to raise interest rates rapidly. But the war was likely to have a bigger impact on European growth, complicating the monetary policy response.
The European Central Bank was in a “much less comfortable position” than the Fed, Gourinchas said.
“The signals are aligning in the US that something needs to be done about inflation, and because the economy is strong there is room to do that without necessarily going into recession territory. The ECB is facing a situation where if it starts to address inflation, then it’s going to make the softening of aggregate demand worse. That’s never a good situation to be in as a policymaker.”
The IMF forecast a 35 per cent collapse in GDP in Ukraine as it suffered from destruction of its infrastructure and mass emigration, while sanctions and a pariah status would lead to an 8.5 per cent drop in Russian GDP.
If Europe and the US went further with sanctions they could intensify the economic pain on Russia, the IMF said in its scenario examining the effects of an oil and gas embargo.
This could knock 15 per cent off Russian economic output by 2027, imposing significant pain on President Vladimir Putin’s regime, but would also come at a significant cost, especially to European economies. The IMF estimated the EU would lose 3 per cent of output by 2023, while global inflation would rise more than another percentage point this year and next.
There was “relatively little” that could be done to mitigate the effects of an embargo in the short term, Gourinchas said.
As for the necessary investment to increase alternative gas supplies significantly, he said “we’re not talking six months, we’re probably not talking one year”, adding there would still be a “sizeable shortfall” even with coal or nuclear supplements.
Given limited alternatives, “there would have to be some adjustment [to] energy consumption inside the EU, and there will be some price adjustment as well”.
Emerging economies would underperform even more in 2022 and 2023 than advanced economies, the IMF said, because most commodity importers were harder hit by higher prices for energy and food imports.
But the good news, it said, was that there had been no significant capital flight from developing nations so far since the Fed signalled it was set to tighten monetary policy significantly this year. “We haven’t had a temper tantrum. We haven’t had capital flows rushing out of emerging markets,” Gourinchas said.
Growth is expected to recover in emerging economies in 2023 as prices stabilise but the forecasts were still weaker than those in January.