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Home Economics

IMF Forecasts Slow Global Economic Growth Amid Uncertainties

Rate Captain by Rate Captain
July 29, 2022
in Economics
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IMF Forecasts Slow Global Economic Growth Amid Uncertainties

The global economy is in a synchronized slowdown and we are, once again, downgrading growth for 2020 to 60 percent, its slowest pace since the global financial crisis and covid 19

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The International Monetary Fund (IMF) has projected an intensified global economic slowdown in 2022 (3.2 percent) and 2023 (2.9 percent) due to the occurrence of higher inflation worldwide, further negative cross-border effects from the war in Ukraine, and tightening financial conditions in emerging markets and developed economies.

This was disclosed by the international organization in its July 2022 World Economic Outlook update, captioned, “Gloomy and More Uncertain”

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According to the IMF, this projected contraction in global economic growth during 2022-23 is a result of the downgrades for China and the United States, as well as for India. This reflects the occurrence of a sharper slowdown in China due to extended lockdowns, tightening global financial conditions associated with expectations of sharper interest rate hikes by major central banks to ease inflation pressure, and spillovers from the war in Ukraine. These were the downside risks highlighted to plague world economic growth potential as captured in the April 2022 World Economic Outlook.

The IMF stated that “growth revisions for major advanced economies in 2022–23 are generally negative.”

“For emerging market and developing economies, the negative revisions to growth in 2022–23 reflect mainly the sharp slowdown of China’s economy and the moderation in India’s economic growth.”

“The revision in emerging and developing Asia is correspondingly large, at 0.8 percentage point in the baseline for 2022. This revision includes a 1.1 percentage point downgrade to growth in China, to 3.3 percent (the lowest growth in more than four decades, excluding the initial COVID-19 crisis in 2020), owing primarily to the aforementioned COVID-19 outbreaks and lockdowns.”

To the report, global trade is expected to contract more than previous expectations, mirroring the decline in global demand and supply chain problems. Supply chain disruptions caused by the war In Ukraine and trade restrictions by some countries have been amplified by the COVID-19 outbreak and mobility restrictions in China—Shanghai, a major global supply chain hub, entered a strict lockdown in April 2022, forcing citywide economic activity to halt for about eight weeks—which is part of the country’s zero-COVID strategy.

Higher-than-expected inflation, particularly in the United States and major European economies, is causing a contraction of global financial conditions. Global inflation is also projected to hit 8.3 percent, up from 6.9 percent in April 2022. This revised inflation is larger for advanced economies, where it is expected to reach 6.3 percent from the 4.8 percent projected in April 2022.

What Are the Constituents of Adverse Global Economic Performance

The IMF highlighted some downside risks that may contribute to the slowing down global economic growth during 2022-23

  • The war in Ukraine further raises energy prices — Russia’s weaponization of its gas supply cuts to the European economies in 2022 would significantly increase inflation worldwide through higher energy prices.
  • Tightening financial conditions — As central banks in advanced economies raise interest rates to stop inflation from spiraling out of control, financial conditions worldwide will continue to tighten
  • A scenario in which larger-scale outbreaks of more contagious COVID-19 variants cause a further widespread lockdown in China under the zero-COVID strategy, thereby slowing China’s economic performance and spilling over to the world economy.

What This Would Mean For Nigeria

As central banks of advanced economies raise interest rates to fight inflation, financial conditions worldwide will continue to tighten. For Nigeria with an appetite for Eurobonds, the rising interest rate can increase borrowing costs and put pressure on foreign reserves. This is not good for the local currency, as pressures on the external reserve can drive down the value of the naira against the dollar.

A further rise in energy prices could be induced by a sharp increase in energy demand in the Eurozone given the possibility of a total shutoff of Russian gas supply to Europe. While this is expected to result in a windfall gain for Nigeria, the reverse will be the case. There will be a pass-through effect of rising energy prices on petrol subsidy costs in Nigeria.

A further lockdown in China will sustain supply shortages given the continued war in Ukraine. This can further push up price levels and hit the poor and vulnerable the hardest.

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