The International Monetary Fund (IMF) announced that its projection for global economic growth is “gloomy and more uncertain” as it reduced its growth expectation for 2022 to 3.2 percent, about half a percentage point lower than previously predicted.
The IMF released its most recent World Economic Outlook report on Tuesday, noting that risks it identified earlier in the year are beginning to come to fruition.
Pierre-Olivier Gourinchas, the IMF’s chief economist, said in a release that three key risks that the organization identified in its report in April are materializing: higher-than-expected and broader inflation, a worse-than-expected economic slowdown in China amid COVID-19 outbreaks and lockdowns and negative effects of the war in Ukraine and associated sanctions that have been put in place.
Gourinchas said global growth has been revised to 2.9 percent for the next year, a drop of 0.7 points from its April projection. Expected inflation was increased to 6.6 percent in advanced economies and 9.5 percent in developing economies.
“Taming elevated inflation should be the first priority of policymakers around the world,” Gourinchas said. “This requires tightening monetary policy, as many central banks have started to do both in advanced economies and emerging markets.”
The report comes as the Federal Reserve is set to potentially raise interest rates as much as three quarters of a percentage point this week in an attempt to curb inflation. The Fed raised interest rates by that amount last month in the largest rate hike since 1994.
The IMF release states that the potential risks to the global economy are “overwhelmingly tilted” to the negative. It states that the war in Ukraine could lead to a sudden stop in European gas imports from Russia, inflation may be harder to bring down than expected and renewed COVID-19 outbreaks could limit Chinese growth.
Gourinchas said the IMF ran an alternative situation in which some of these risks materialize, causing growth next year to fall to 2 percent. Global growth has only been lowered five times since 1970.
He said countries will need to increase the resilience of their financial systems to prepare for “tighter” financial conditions. He added that policymakers should pay attention to health and climate resilience, working to increase vaccination rates to prevent future COVID-19 outbreaks and take action to address climate change.