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United Kingdom: Accelerate structural reforms to keep the recovery on track

Still reeling from the COVID pandemic and Russia’s invasion of Ukraine, the global economy faces an increasingly murky and uncertain outlook, according to the latest report released Tuesday by the International Monetary Fund. (IMF).

The July 2022 Global Economic Outlook Update: Dark and more uncertainhighlights the important consequences of the blocking of the three main world economic powers which are the United States, China and the major European economies.

“The outlook has darkened considerably since April,” said Pierre-Olivier Gourinchas, IMF Economic Advisor and Director of Research.

“The world could soon teeter on the brink of a global recession, just two years after the last one.”

The baseline forecast calls for global growth to slow from 6.1% last year to 3.2% in 2022, 0.4% lower than projected in the last Outlook update in April.

Three key savings

With higher-than-expected inflation – particularly in the US and larger European economies – global financial conditions are tightening.

In the United States, the reduction in household purchasing power and the tightening of monetary policy will cause growth to fall to 2.3% this year and 1% next year, according to the outlook.

China’s slowdown was worse than expected in the middle COVID-19[feminine] epidemics and blockages, the negative effects of the invasion of Ukraine by Russia continuing.

Additionally, further shutdowns and a deepening housing crisis have slumped growth to 3.3% this year — the slowest in more than four decades, excluding the pandemic.

And in the eurozone, growth has been revised down to 2.6% this year and 1.2% in 2023, reflecting fallout from the war in Ukraine and tighter monetary policy.

“As a result, global production contracted in the second quarter of this year,” Gourinchas said.

Inflation

Despite the global slowdown, inflation has been revised upwards, partly due to higher food and energy prices.

This year, it is expected to reach 6.6% in advanced economies and 9.5% in emerging and developing economies, upward revisions of 0.9 and 0.8 percentage points respectively. And it should stay high for longer.

Widespread inflation in many economies reflects “the impact of cost pressures from disrupted supply chains and historically tight labor markets,” the IMF official said.

Downside risks

The report describes certain future risks, in particular that the war in Ukraine could end European gas supply from Russia absolutely; rising prices could lead to widespread food insecurity and social unrest; and geopolitical fragmentation can hamper global trade and cooperation.

Inflation could remain stubbornly high if labor markets remain too tight or if inflation expectations are too optimistic and prove more costly than expected.

And new COVID-19 outbreaks and lockdowns threaten to further dampen China’s growth.

“In a plausible alternative scenario where some of these risks materialize … inflation will rise and global growth will slow further to around 2.6% this year and 2% next year, a pace that growth has fallen below. five times since 1970,” said the IMF economist.

“In this scenario, the United States and the eurozone will experience near-zero growth next year, with negative ripple effects for the rest of the world.”

Destabilizing inflation

Current inflation levels pose a clear risk to macroeconomic stabilitydepending on the outlook.

In response to the situation, central banks in advanced economies are withdrawing monetary support faster than expected, while many emerging market and developing economies began raising interest rates last year.

“The resulting synchronized monetary tightening across countries is unprecedented in history, and its effects are expected to be felt, with global growth slowing next year and inflation decelerating,” Mr. Gourinchas.

Political priorities

While acknowledging that a tightening of monetary policy would have economic costs, the IMF official confirmed that delaying it would only exacerbate the difficulties.

And hampered by difficulties in coordinating creditor agreements, how and if the debt can be restructured, remains unpredictable.

He argued that national policies responding to the effects of high energy and food prices should focus on those most affected, without distorting prices.

“Governments should refrain from hoarding food and energy and instead seek to remove trade barriers such as food export bans, which drive up global prices,” the IMF official advised.

Meanwhile, climate change mitigation continues to require rapid multilateral action to limit emissions and increase investment to accelerate a “green transition”.

Policy makers are advised to ensure that the measures are temporary and only cover energy shortages and climate policies.

On the edge of the abyss

From climate transition and pandemic preparedness to food security and over-indebtedness, multilateral cooperation is essentialsaid the IMF economist.

“In a context of great challenges and conflicts, strengthening cooperation remains the best way to improve economic prospects and mitigate the risk of geoeconomic fragmentation“, he underlined.