By Onome Amuge.
Global economic growth has been projected to slow from 6.1 percent in 2021 to 3.2 percent in 2022 and slip further to 2.9 percent in 2023, downgrades of 0.4 and 0.7 percentage points, respectively, according to the July 2022 World Economic Outlook compiled by the International Monetary Fund (IMF).
The international financial institution, in its latest report released on Tuesday, attributed the projected economic downturn to higher-than-expected inflation which triggered a tightening of global financial conditions, especially in the U.S and major European economies.
The IMF further noted that China’s “worse than anticipated” economic situation was impacted by the COVID-19 outbreaks and lockdowns, adding that further negative spillovers from the war in Ukraine resulted in the decline of global output in the second quarter of 2022.
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“The outlook has darkened significantly since April. The world may soon be teetering on the edge of a global recession, only two years after the last one,” IMF noted.
Also, global inflation was revised upwards, led by significant hikes in food and energy prices as well as lingering supply-demand imbalances.
As a result, inflation on a global scale is anticipated to reach 6.6 percent in advanced economies and 9.5 percent in emerging market and developing economies in 2022 – upward revisions of 0.9 and 0.8 percentage points, respectively.
With the risks to the outlook overwhelmingly tilted to the downside, the report noted that inflation could be harder to bring down than anticipated either if labour markets are tighter than expected or inflation expectations unanchor.
It further pointed out that tighter global financial conditions could induce debt distress in emerging markets and developing economies, while geopolitical fragmentation could impede global trade and cooperation.
“A plausible alternative scenario in which risks materialise, inflation rises further, and global growth declines to about 2.6 percent and 2.0 percent in 2022 and 2023, respectively, would put growth in the bottom 10 percent of outcomes since 1970. Under this scenario, both the United States and the euro area experience near-zero growth next year, with negative knock-on effects for the rest of the world,” the Washington based institution warned.
Policy priorities to address economic decline
As increasing prices continue to squeeze living standards worldwide, the IMF advised that taming inflation should be the first priority for policymakers. It added that tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them.
Other policy priorities suggested by the IMF report include:
*Targeted fiscal support. This, it explained, can help cushion the impact on the most vulnerable. The IMF however noted that with government budgets stretched by the pandemic and the need for a disinflationary overall macroeconomic policy stance, such policies will need to be offset by increased taxes or lower government spending.
*Judicious use of macroprudential tools and making reforms to debt resolution frameworks to curb tighter monetary conditions expected to affect financial stability.
*Policies to address specific impacts on energy and food prices should be focused on those most affected without distorting prices.
*Increased vaccination rates to guard against future Covid-19 variants.
*Urgent multilateral action to limit emissions and raise investments to hasten the green transition, thereby mitigating climate change.