The International Monetary Fund has warned of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies. The fund has lowered its growth outlook for the global economy and warned that inflation in many countries is threatening to undermine future growth. “Inflation has become a clear and present danger in many countries,” the IMF said.
Compared to its January forecast, the IMF has revised its projection for global growth downwards to 3.6 percent in both 2022 and 2023. This year’s growth outlook for the European Union has been revised downward by 1.1 percentage points due to the indirect effects of the war, making it the second largest contributor to the overall downward revision.
At the beginning of the IMF and World Bank Spring meetings in Washington DC, the fund noted an increasing risk that inflation expectations drift away from central bank inflation targets, prompting a more aggressive tightening response from policymakers. Furthermore, increases in food and fuel prices may also significantly increase the prospect of social unrest in poorer countries.
‘Inflation will remain elevated for much longer’
“Even prior to the war, (inflation) surged on the back of soaring commodity prices and supply-demand imbalances,” IMF’s director of research Pierre-Olivier Gourinchas (pictured) said in a blog post “War-related disruptions amplify those pressures. We now project inflation will remain elevated for much longer.”
The IMF said overall economic risks have risen sharply, and policy tradeoffs have become even more challenging. It noted that the pandemic already has eroded policy space in many countries and that a withdrawal of extraordinary fiscal support was projected to continue.
“The surge in commodity prices and the increase in global interest rates will further reduce fiscal space, especially for oil- and food-importing emerging markets and developing economies,” it said.
‘Tectonic shift towards permanent fragmentation’
The war also increases the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies, the IMF said.
“Such a tectonic shift would cause long-run efficiency losses, increase volatility and represent a major challenge to the rules-based framework that has governed international and economic relations for the last 75 years.”
Uncertainty around these projections is considerable, well-beyond the usual range.
“Growth could slow down further while inflation could exceed our projections if, for instance, sanctions extend to Russian energy exports,” the IMG said. “Continued spread of the virus could give rise to more lethal variants that escape vaccines, prompting new lockdowns and production disruptions.”
Ending the war ‘most immediate priority’
In this difficult environment, national-level policies and multilateral efforts will play an important role, it said. “Central banks will need to adjust their policies decisively to ensure that medium- and long-term inflation expectations remain anchored. Clear communication and forward guidance on the outlook for monetary policy will be essential to minimize the risk of disruptive adjustments.”
Even as policymakers focus on cushioning the impact of the war and the pandemic, other goals will require their attention, said the IMF.
“The most immediate priority is to end the war.” it said.
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