Weak growth and inflation: the explosive mix the IMF has predicted this year

Posted on April 19, 2022, 3:00 PMUpdated on Apr 19, 2022 at 7:51 PM

Significantly lower growth and higher inflation for a longer period. According to the International Monetary Fund, this is the international situation looming in the coming months. In his first presentation of economic forecasts, the institution’s new chief economist, Pierre-Olivier Gorinchas, warned: “The uncertainty around these forecasts is great.”

more than usual. Growth may slow further while inflation may exceed our expectations, for example, if sanctions extend to Russian energy exports. The continued spread of the Covid-19 virus could lead to the emergence of more deadly variants […], causing further blockage and interruption of production. »

Currently, the multilateral institution has reduced the increase in global GDP to 3.6% this year. This is eight-tenths of a point lower than the prediction made at the beginning of the year, before the conflict between Ukraine and Russia erupted. These two countries will suffer a deep recession. War-torn Ukraine will see a sharp drop in GDP of at least 35%. Russia (-8.5%) and Belarus (-6.4%) are affected by the sanctions.

Adjacent to the conflict zone and dependent on raw materials for Russian energy, European countries should only maintain a slight growth, due to the gains made at the beginning of the year. But the increase in eurozone GDP will be only 2.8% in 2022, not 3.9% as was projected in January. German growth, now expected at 2.1%, is paying a heavy price, while French GDP is expected to grow by 2.9%.

If growth falters, price increases will almost double, to an average of 5.7% in rich countries, down from 3.1% last year.

We now expect inflation to remain elevated for a longer period. In the United States and in some European countries, it reached its highest level in more than 40 years.

It should also be noted that the IMF is based on the average price of a barrel of oil around $107 over the course of the year versus $69 in 2021, with prices particularly volatile. We now expect inflation to remain high for much longer. In the United States and in some European countries, it reached its highest level in more than 40 years, notes Pierre-Olivier Gorinchas.

As a result, central banks face a difficult trade-off between fighting record inflation and protecting the recovery that emerged after the Covid-19 crisis, the Fund warned in another report dedicated to financial stability. By departing from the central bank’s targets, inflation is likely to prompt further monetary tightening. The US Federal Reserve has already started. But higher interest rates “could lead to a disorderly correction” of financial markets, including at the real estate level, concerns the fund.

Public Debt Record

Added to this is the fact that rising food and fuel prices can lead to social unrest in the poorest countries. The IMF projects an average inflation rate of 8.7% in developing countries, up from 5.9% in 2021. The problem is that this commodity price boom and global interest rate pressure will reduce fiscal space for emerging markets and import oil and food. developing economies.

A complete restructuring of the sovereign debt will be necessary.

As the pandemic has led to record levels of public debt worldwide, the IMF said, higher interest rates will mean tough choices about fiscal consolidation, “as pressures on social spending and, in some cases, defense costs can remain high.”

At this point, for the most fragile countries, “a complete restructuring of sovereign debt will be necessary,” warns Pierre-Olivier Gornchas. In this area, the joint framework established by the G-20 to solve the problem of potential over-indebtedness has not produced any tangible results so far. “It is a defect in the global financial system,” the chief economist laments. However, about 60% of low-income developing countries are already overburdened with debt or at high risk of over-indebtedness, the multilateral institution notes.

video. The European Central Bank remains determined to fight inflation

Leave a Comment

Your email address will not be published.