IMF also raised its global economic growth forecast in 2023 by 0.2 percentage points to 3.8%, but pointed out that the increase in global growth in 2023 is mainly technical, because the factors that drag down global growth in 2022 will eventually dissipate, and growth will only become faster in 2023.
IMF begins with entering 2022, and the global economic situation is worse than the IMF's previous expectations, and the world faces multiple downside risks: With the emergence of Omickron strain , new cases have increased, and countries have re-implemented restrictions; rising energy prices and supply chain disruptions have led to higher and wider inflation than expected, especially in the United States and many emerging and developing economies; in addition, with the imminent interest rates in developed economies, global financial stability and capital flows, monetary and fiscal conditions in emerging and developing economies may face risks, especially some economies have increased and unabated debt levels in the past two years. Other global risks include the continued tensions in geopolitical and the rising possibility of major natural disasters .
However, IMF chief economist Gita Gopinath pointed out that there are some downside risks, such as the Omickron strain that may last for a shorter period. She said the new strain appears to be milder than delta , and the number of infections is expected to decline relatively quickly. Therefore, the IMF expects that although the Omickron strain of will have an impact on economic activity in the first quarter of 2022, this impact will weaken from the second quarter.
IMF also expects global inflation to last longer than it was estimated in October last year and will not fade until 2023. However, unlike other economies, the U.S. labor market may be tightened, and the resulting wage increases may be transmitted to prices.
U.S. economic growth is expected to be lowered by 1.2 percentage points
In the WEO in October last year, the IMF predicts that the U.S. economic growth rate is expected to reach 5.2% in 2022, up 0.3 percentage points from the previous forecast. However, in this WEO, IMF significantly reduced the US economic growth rate in 2022 by 1.2 percentage points to 4%, the largest drop among all developed economies. The reasons given by IMF include the fiscal stimulus bill launched by the United States to be difficult to produce, the United States withdraws monetary easing early, and continued supply chain disruptions.
IMF has also lowered the economic growth rate of some other major developed economies this year. The continuation of supply chain disruptions and the damage to the economy by the epidemic have caused the IMF to lower the economic growth rate of euro zone this year by slightly 0.4 percentage points to 3.9%. Among them, as the German economy was hit harder by supply chain disruptions, the IMF's reduction in Germany's economic growth this year has reached 0.8 percentage points. In the UK, the Omickron strain also impacted the country's economy, and also faced supply chain disruptions in the labor and energy markets. The IMF also lowered the UK's economic growth rate by 0.3 percentage points to 4.7%. Although Canada's weak economic data rebounded at the end of 2021, as the U.S. economic growth is expected to slow, the IMF expects Canada's external demand to weaken further in 2022, which has caused the IMF to lower Canada's economic growth forecast this year by 0.8 percentage points to 4.1%, the same as Germany, second only to the United States.
is not just a developed economy, but IMF has also lowered the growth rate expectations of several emerging and developing economies this year. IMF lowered China's growth rate in 2022 by 0.8 percentage points to 4.8%. In order to combat inflation, Brazil has adopted a strong monetary policy response, which has affected domestic demand, so the IMF expects Brazil's economic outlook to deteriorate. IMF has sharply lowered Brazil's growth forecast this year by 1.2 percentage points, the largest drop among all emerging market economies. In addition, the IMF said that the reduction in US economic growth will affect Mexico's external demand and make its economic outlook lower than previous expectations.South Africa's economy was lower than the IMF's previous expectations in the second half of 2021. At the same time, South Africa's business confidence continued to be sluggish and its investment prospects weakened. This has also lowered South Africa's growth forecast this year by 0.3 percentage points.
Global inflation will fade in 2023
IMF expects inflation to last longer than the IMF expected in October WEO and continues to rise in the short term. expects the average inflation rate of developed economies to be 3.9% in 2022 and the average inflation rate of emerging markets and developing economies to be 5.9%. However, the IMF also believes that inflation will fall in 2023.
report said that if the medium-term inflation expectations remain stable and the epidemic is controlled, as supply chain disruptions ease and monetary policy tightens, demand shifts from commodity-intensive consumption to service-intensive consumption, and futures market expects energy and food prices to grow at a more moderate rate this year, and high inflation is expected to fade in 2023.
However, the IMF believes that the situation in the United States is slightly different. In many countries, nominal wage growth is still under control despite employment rates almost returning to pre-pandemic levels. But in the United States, the sharp decline in unemployment is accompanied by a strong increase in nominal wages. This shows that there is a certain degree of tightening in the US labor market. If the U.S. labor force participation rate remains below pre-pandemic levels and frustrated workers continue to wait and see, a tightening of the labor market could lead to higher prices.
Federal Tightening monetary policy may put pressure on emerging markets
In terms of global monetary policy, the IMF believes that for many countries, it is necessary to shrink monetary policy in order to control inflation. But IMF also warned of the possible risks of the global monetary tightening cycle.
IMF said that the reduction of loose monetary policy in developed economies will bring challenges to the central bank and governments of emerging markets and developing economies. The higher ROI from developed economies will prompt capital outflows from emerging markets, put downward pressure on currencies in emerging markets and developing economies, and increase inflation. If these economies do not take corresponding austerity measures, it will increase the burden on public and private foreign exchange borrowers, but tightening policies also have costs, which will make it more difficult for domestic borrowers to obtain credit.
"Emerging markets are generally more flexible at present, with higher foreign exchange reserves in and better current account balances than in the previous tightening cycle (such as during the 2013 shrinkage panic). But financial vulnerability remains. Many economies have higher public and private debts. Therefore, as they follow the contraction of monetary policies in advanced economies, the debt repayment burden may increase significantly." The report notes. Gopinas said that in some cases, some economies may require foreign exchange intervention and temporary capital flow management measures.
In addition, the IMF also warns that in the process of tightening monetary policies in various countries, especially if policy intentions are not clearly conveyed, it may have an impact on financial stability. "Many financial sectors are still vulnerable at the moment. If investors reassess the economic and policy outlook due to monetary policy tightening, a sudden repricing of market risks may interact with this vulnerability, leading to more tense financial conditions," the report noted.
Based on this, the IMF emphasized that effective monetary policy communication is a key tool to avoid overreaction in the financial market, especially the impact of the Omickron strain is still extremely uncertain. Central banks should make it clear that if the epidemic worsens again, it may need to readjust the exit speed of monetary support policies.
IMF also stressed that international cooperation is also crucial to reducing pressure in the upcoming tightening cycle . For example, the liquidity of reserve currencies through the IMF can be lower than the related risks and amplified into global risks. For countries with large financing needs and unsustainable debt, liquidity reduction alone may not be enough. In this case, the rapid implementation of the G20 common framework for debt handling will provide an effective mechanism for timely and orderly debt restructuring.
