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IMF cuts global growth forecasts on Russia-Ukraine war

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BM.GE
19.04.22 22:30
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The International Monetary Fund on Tuesday cut its global growth projections for 2022 and 2023, saying the economic hit from Russia’s unprovoked invasion of Ukraine will “propagate far and wide.”

The Washington-based institution is now projecting a 3.6% GDP rate for the global economy this year and for 2023. This represents a 0.8 and 0.2 percentage point drop, respectively, from its forecasts published in January.

“Global economic prospects have been severely set back, largely because of Russia’s invasion of Ukraine,” Pierre-Olivier Gourinchas, economic counsellor at the IMF, said in a blog post Tuesday, marking the release of the IMF’s latest World Economic Outlook report.

Russia launched its invasion of Ukraine on Feb. 24 with officials like NATO’s Jens Stoltenberg noting that Moscow is hoping to gain control of the whole of its neighbor.

“The effects of the war will propagate far and wide, adding to price pressures and exacerbating significant policy challenges,” Gourinchas said in his blogpost.

The World Bank also cut its global growth expectations on Monday, now estimating a growth rate for 2022 of 3.2%, down from 4.1%.

Ukraine to contract 35%

The United States, Canada, the U.K. and the European Union have imposed several rounds of sanctions targeting Russian banks, oligarchs and energy.

The IMF said these penalties will have “a severe impact on the Russian economy,” which estimated that the country’s GDP will fall by 8.5% this year, and by 2.3% in 2023.

However, the fund has forecast an even bleaker assessment for the Ukrainian economy.

“For 2022, the Ukrainian economy is expected to contract by 35%,” the IMF said in its latest economic assessment, while adding that more precise analysis on the economic hit was “impossible to obtain.”

“Even if the war were to end soon, the loss of life, destruction of physical capital, and flight of citizens will severely impede economic activity for many years to come,” the organization said.

Inflation concerns

More broadly, Russia’s decision to invade Ukraine has intensified supply shocks to the global economy, while also bringing about new challenges.

“Russia is a major supplier of oil, gas, and metals, and, together with Ukraine, of wheat and corn. Reduced supplies of these commodities have driven their prices up sharply,” the fund said Tuesday.

This is expected to hurt lower-income households globally and lead to higher inflation for longer than previously anticipated. The IMF estimates the inflation rate will reach 7.7% in the United States this year and 5.3% in the euro zone.

“The risk is rising that inflation expectations drift away from central bank inflation targets, prompting a more aggressive tightening response from policymakers,” the fund said.

The U.S. Federal Reserve expects to hike interest rates six more times in 2022, while the European Central Bank confirmed last week it is ending its asset purchase program in the third quarter.

However, this monetary tightening could be accelerated if inflation remains high.

The latest IMF economic outlook also points to concerns about the 5 million Ukrainian refugees who have sought support in neighboring countries, such as Poland, Romania and Moldova, and the ensuing economic pressures for these nations from supporting them.

Speaking to CNBC Tuesday, Tobias Adrian, director for monetary and capital markets at the IMF, said that the current string of crises hitting the global economy reminded him of the euro sovereign debt crunch which followed the 2008 crash.

“Many commentators and policymakers hoped that the 2008 crisis was over but they were just about to enter this new sovereign debt crisis. Today, we had the pandemic, the pandemic caused tremendous stress in the financial markets … It has left the financial system with certain vulnerabilities and so on top of this pandemic, in this phase of pandemic recovery comes the war in Ukraine and that has caused further stresses in some segments,” he told CNBC’s Geoff Cutmore.

Source: CNBC