IMF slashes global growth forecast due to impact from Russia’s invasion of Ukraine

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Russia’s invasion of Ukraine has upended the global recovery from the coronavirus pandemic, pushing inflation higher and fragmenting the world trading system, the International Monetary Fund said Tuesday.

Global economic prospects have “worsened significantly” in recent months, the IMF said in its latest World Economic Outlook. Higher food and energy prices are squeezing commodity importers and aggravating food insecurity, while another round of pandemic-related lockdowns in China has further disrupted international supply chains.

“In the matter of just a few weeks, the world has yet again experienced a major shock,” IMF chief economist Pierre-Olivier Gourinchas said at a Tuesday news conference. “Just as a durable recovery from the pandemic was in sight, war broke out, potentially erasing recent gains.”

This amplifies the challenges policy makers were already facing. Advanced-economy central banks, including the Bank of Canada, are trying to raise interest rates rapidly to combat runaway inflation without tripping their economies into recession. Governments, meanwhile, were banking on strong economic growth to start consolidating the massive amount of debt taken on during the pandemic.

With policy makers from around the world gathering in Washington this week for the spring meetings of the IMF and the World Bank, the IMF provided a sharp downward revision to its economic outlook. It now expects the world economy to grow 3.6 per cent this year, 0.8 percentage points lower than its last forecast in January.

The biggest revisions were for Ukraine and Russia. Ukraine’s economy is expected to contract by 35 per cent this year, while Russian economic activity is expected to fall by 8.5 per cent.

Additional sanctions – such as an embargo on Russian oil, currently being debated by the European Union – would further undercut the country’s economy. IMF modelling suggests that Russia’s GDP could fall an additional 15 per cent in the face of strict energy sanctions.

The economic fallout is rippling far beyond the borders of Ukraine and Russia. Developing countries that import energy and food are being squeezed particularly hard, raising the risk of food insecurity and political unrest.

“When food and energy prices – which represent up to 40 per cent of the consumption basket for lower-income households or in poorer countries – when these prices rise, and they rise sharply, that could create a lot of hardship and a lot of instability,” Mr. Gourinchas said.

European countries that rely on Russian oil and gas are also being hit hard by higher energy prices as well as manufacturing disruptions. The IMF cut its 2022 estimates for economic growth in Germany and Italy by 1.7 percentage points and 1.5 percentage points, respectively. Economic growth in the euro area as a whole is expected to be 1.1 percentage points lower this year than forecast in January.

Canada is in a comparatively good position. As a major commodity producer, Canadian farmers, miners and energy companies will benefit from higher global prices. At the same time, this could be balanced out by slower growth among the country’s key trade partners, including the United States, the IMF said.

The fund expects the Canadian economy to grow 3.9 per cent this year – down 0.2 percentage points from its January forecast – and 2.8 per cent next year. That projection, which is slightly lower than the Bank of Canada’s estimate published last week, would put Canada among the fastest-growing advanced economies over the next two years.

A key risk for Canada, as with other advanced economies, is that inflation remains stubbornly high and inflation expectations become unanchored from the Bank of Canada’s target. That could prompt the central bank to push rates up to punishingly high levels, risking the stability of Canada’s highly leveraged housing market.

The IMF expects inflation to average 5.7 per cent in 2022 in advanced economies and 8.7 per cent in emerging-market and developing economies – which is 1.8 and 2.8 percentage points higher than projected in January.

“Although a gradual resolution of supply-demand imbalances and a modest pickup in labour supply are expected in the baseline, easing price inflation eventually, uncertainty again surrounds the forecast. Conditions could significantly deteriorate,” the IMF warned.

Beyond the immediate economic shock caused by the war in Ukraine, Mr. Gourinchas said that the war could further fragment the world economy into competing geopolitical blocks, each with their own technology standards, payment systems and reserve currencies.

“Such a tectonic shift would cause long-run efficiency losses, increased volatility, and represent a major challenge to the rules-based framework that has governed international and economic relations for the last 75 years,” he said.

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