Steep price hikes in food and fuel due to inflation, conflict, the pandemic and climate change are expected to slow global growth by a percentage point to around 3.6% this year, the International Monetary Fund forecasts. The outlook grows dimmer by the day, with the IMF expecting inflation to peak in late 2022 at 9%.
According to the financial prediction, the UK, one of the world’s strongest economies, will be hit hardest. The IMF estimates UK growth will slow as price pressures lead households to cut spending while rising interest rates are expected to cool investment.
The UK’s economy is now predicted to grow by 3.7% this year, down from the previous forecast of 4.7% in January. In 2023, the UK is expected to have the slowest growth in the G7 and across Europe’s leading economies, at just 1.2%, nearly half of the previous expectation.
“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,” the IMF says.
“We now project inflation will remain elevated for much longer. In the US and some European countries, it has reached its highest level in more than 40 years, in the context of tight labor markets.”
Inflation threatening stellar economies
The Russian-Ukrainian conflict has devastated these economies, with the West cutting off essential trade and financial networks and imposing sanctions on Russia. The IMF reports that Ukraine faces a severe contraction of 35% or more this year, while Russia’s economy is expected to shrink by 8.5%.
The knock-on effects are considerable globally as Russia is a major energy producer and key supplier of staples such as wheat and corn alongside Ukraine. Food and energy prices were already steep due to the COVID-19 pandemic supply bottlenecks.
“Russia is a major supplier of oil, gas, and metals, and, together with Ukraine, wheat and corn. Reduced supplies of these commodities have driven their prices up sharply. Commodity importers in Europe, the Caucasus and Central Asia, the Middle East and North Africa, and sub-Saharan Africa are most affected. But the surge in food and fuel prices will hurt lower-income households globally, including in the Americas and the rest of Asia,” the IMF warns.
In addition, the UK is struggling with high inflation, and the effects on economic growth will be visible in 2023 as consumers cut spending and their income shrinks. The 2023 UK expectation is the slowest apart from heavily-sanctioned Russia in the wider G20 grouping, including nations such as China and India.
Inflation figures degrading rapidly
The IMF lowered its forecast for the US by 0.3 percentage points to 3.7%, citing the prospect of more aggressive interest rate rises. In general, inflation pressures are considerably worse than when the IMF issued its previous forecast in January.
It now predicts inflation in advanced economies will hit 5.7% this year, while it is likely to reach 8.7% in emerging markets. UK inflation is expected to be 5.3% next year, the highest in the G7, higher than all EU members, and only exceeded in the G20 by crisis-ridden Argentina, Turkey and Russia.
A few oil-exporting countries are benefiting from the inflation crisis. For example, the IMF expects growth in Saudi Arabia to be stronger.
Eastern Europe and Central Asia have large direct trade and remittance links with Russia and are expected to suffer. The displacement of about five million Ukrainian people to neighboring countries, especially Poland, Romania, Moldova and Hungary, adds to economic pressures in the region.
“On climate, we must close the gap between stated ambitions and policy actions. An international carbon price floor differentiated by country income levels would provide a way to coordinate national efforts aimed at reducing the risks of catastrophic climate events,” the IMF urges.
“Equally important is the need to secure equitable worldwide access to the full complement of COVID-19 tools to contain the virus and address other global health priorities. Multilateral cooperation remains essential to advance these goals.”
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