China's "zero tolerance" policy on COVID-19 cases risks exacerbating disruptions to global supply chains. Problems in the Chinese real estate sector could also spread to the rest of the Chinese economy.
Taken from AFP WASHINGTON
The global economy will grow less than expected this year, mainly due to the slowdown in the United States and China, the IMF warned on Tuesday, pointing to a horizon clouded by economic downturns, high inflation and rising interest rates.
The International Monetary Fund expects global Gross Domestic Product (GDP) to expand by 4.4% in 2022, 0.5 percentage points less than projected in October and following 5.9% growth in 2021, the organization indicated in its updated World Economic(WEO), which anticipates an even weaker rebound in Latin America.
"Growth is slowing as economies grapple with supply disruptions, higher inflation, record debt and persistent uncertainty," summarized Gita Gopinath, deputy managing director of the IMF, in a blog post.
The IMF also estimated that inflation will average 3.9% (+1.6 points) this year in advanced economies, and 5.9% (+1 point) in emerging and developing economies, persisting "for longer than previously expected" before easing in 2023.
Growth projections were lowered for the vast majority of countries. Only one region (the Middle East and Central Asia) and a handful of nations, including Argentina, India, and Japan, are exceptions.
According to the IMF, the slowdown in global growth is "essentially" the result of a less vigorous expansion in the United States and China: from +4% (-1.2 points) and +4.8% (-0.8 points) forecast respectively for this year.
US and Chinese slowdown
For the United States, the Fund removed from its baseline projections the benefits that President Joe Biden's "Build Back Better" plan, which proposes some $1.8 trillion in social spending, could bring because it is bogged down in Congress.
Furthermore, in the world's largest economy, inflation is much higher than expected and supply problems persist. Meanwhile, China faces a recession in its real estate sector and weaker domestic consumption linked to drastic measures to curb the spread of omicron.
Supply disruptions also led to lower forecasts in the euro zone, where growth is expected to be 3.9% (-0.4 points), with reductions in the outlook for Germany (to 3.8%, -0.8 points) and Spain (to 5.8%, -0.6 points).
While advanced economies should return to their pre-pandemic trend this year, the Fund indicated that a recession in several emerging markets and developing economies in the medium term cannot be ruled out.
Cuts for Brazil and Mexico
For Latin America and the Caribbean, the IMF forecasts an expansion of 2.4% (-0.6 points), with cuts for the two largest economies: Brazil's GDP will only grow 0.3%, and Mexico's, 2.8% (in both cases, -1.2 points compared to the estimate in October).
In Brazil, "the fight against inflation has triggered a strong monetary policy response, which will weigh on domestic demand. A similar dynamic is taking place in Mexico, although to a lesser extent," the Fund stated, alluding to the interest rate hikes by the central banks of the two countries.
"Furthermore, the downward revision of the US growth forecast brings with it the prospect of weaker-than-expected external demand for Mexico in 2022," he added.
In contrast, Argentina, the third largest Latin American economy, which has been negotiating for months to refinance a $44 billion debt with the IMF, is expected to grow by 3% in 2022 (+0.5 points), after a contraction of 9.9% in 2020 and an expansion of 10% in 2021.
Multiple threats
IMF economists agree that global growth faces multiple threats.
China's "zero tolerance" policy on COVID-19 cases risks exacerbating disruptions to global supply chains. Problems in the Chinese real estate sector could also spread to the rest of the Chinese economy.
At the same time, higher inflation in the United States could lead to a much more aggressive monetary tightening
For now, the IMF is considering a scenario of three interest rate hikes in the United States this year and three next year. If the Federal Reserve (the US central bank) were to raise its benchmark interest rates more quickly and sharply, emerging and developing countries, whose debt is denominated in dollars, would be directly affected.
The IMF also points to "growing geopolitical tensions and social unrest" due to inflation, without ruling out the possibility of more dangerous variants than omicron appearing.
The IMF therefore reiterated the importance of controlling the pandemic, emphasizing the need for widespread vaccination in developing countries.
For 2023, the Fund raised its global growth estimate to 3.8% (+0.2 points), expecting the current brakes to dissipate in the second half of this year.
