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The IMF cuts its global growth forecast for 2022

It blames Omicron, bunged-up supply chains and China’s property bust

A lot can happen in three months. Since October, when the International Monetary Fund (IMF) published its last set of economic forecasts, known as the World Economic Outlook (WEO), a new variant of covid-19 has emerged, a Chinese property giant with some $300bn in liabilities has defaulted on its debt and inflation in America has soared to its highest rate in nearly four decades. On January 25th the IMF released an update to its flagship report. It concludes that these events, among others, will cause the global economy to grow by half a percentage point less in 2022 than previously expected, down from 4.9% to 4.4%.

The world’s two biggest economies account for much of the decline. Growth in America has been revised down by 1.2 percentage points from 5.2% to 4%, owing to the dimming prospects of President Joe Biden’s social-spending package, an earlier-than-expected schedule for tightening monetary policy and disruption to supply chains. Growth in China, meanwhile, has been downgraded by 0.8 percentage point from 5.6% to 4.8% because of travel restrictions imposed as part of the country’s zero-covid strategy and a slowdown in its property market sparked by the failure of Evergrande, the aforementioned property firm. The IMF also expects growth to be lower than previously forecast in the euro area, Britain, Brazil and Russia, among others.

Although the IMF is slightly gloomier about global GDP growth than it was three months ago, it remains relatively sanguine about inflation. Prices surged in 2021 in part because of a shift in consumption away from services such as eating out towards goods such as furniture and home-exercise equipment, which overloaded global supply chains. As demand shifts back from goods to services, and central banks raise interest rates, the IMF argues, supply-chain disruptions will ease and “higher inflation should fade”. The blockages have already done plenty of damage. The IMF reckons that clogged ports and other bottlenecks reduced global GDP growth in 2021, which was 5.9%, by as much as one percentage point while adding one percentage point to core inflation.

On the fate of emerging economies once America’s Federal Reserve starts raising interest rates, the IMF is less optimistic. It expects the central bank, which meets this week, to raise rates three times in 2022 and three times again in 2023. Markets now expect four rate increases this year. The fear is that these rises will trigger capital outflows and currency depreciation in emerging economies. Many central banks will be forced to raise rates further in response. Countries with large debts denominated in foreign currencies, the fund warns, “should prepare for possible turbulence in financial markets”.

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