Global growth expectations are downgraded, as high inflation, and the impact of the omicron variant weigh on the International Monetary Fund (IMF)’s latest quarterly update to the World Economic Outlook report, launched this week in Washington, DC.

The global recovery is multi-speed and divergent, meaning that some regions and countries are performing better than others, noted Gita Gopinath, the First Deputy Managing Director of the IMF. However, the bulk of the downgrade is due to increasing uncertainty in the US and China.

“The IMF's latest world economic outlook, therefore, anticipates that while Omicron will weigh on activity in the first quarter of this year, this effect will fade starting in the second quarter. Other challenges and policy pivots are expected to have a greater impact on the outlook. We project global growth this year at 4.4 per cent, which is 0.5 percentage points lower than previously forecast, mainly because of downgrades for the United States and China,” Ms. Gopinath told reporters in a virtual briefing. 

Russia-Ukraine tensions could keep inflation elevated

One major uncertainty is also the ratcheting up of tensions between Russia and NATO, with the build-up of troops along the Ukrainian border.

 

“The consequences for the energy markets would be likely would be any further increase in prices of oil and natural gas, and therefore energy costs more broadly for many countries in the world,” the IMF executive added. “So in terms of headline inflation numbers that certainly could keep headline inflation much more elevated for longer. Of course, we are hoping, like all of the international community, that there can be a peaceful resolution to this issue.”

The IMF has been warning that international equities markets have been ‘stretched,’ and the team was asked about Monday (24 Jan)’s global stock market volatility.

Markets look over-valued, corrections may follow

“We have been of the view – and we've said this in previous global financial stability reports – that markets look overvalued and, in several spots, and there is a high level of exuberance, and therefore there could be market corrections,” warned Ms. Gopinath. 

“So, one would expect that as interest rates go up, we would see corrections in markets. The hope is that this will stay orderly and as long as that can be, well, telegraphed communication from the US fed about their monetary policy – part about reasons why they are taking the actions that they are doing – that should certainly help with having a more orderly correction in markets.”

Argentina’s debt issues

Ms. Gopinath was asked at length about IMF negotiations with Argentina as that country is struggling to keep current in its payments on international debt. “We're working very closely with the authorities. We understand that the social and economic situation is challenging, which is why we are adopting a flexible and pragmatic approach. And we hope we will make even more progress in the next days,” said Ms. Gopinath who as newly-promoted IMF FDMD will begin to play a key role in negotiations with Buenos Aires. 

Argentina is not alone facing debt issues. The IMF has supported countries taking loans to support stimulus and health spending during the onset of pandemic. But the Fund recognises that as the US Federal Reserve and other central banks raise rates to combat inflation, there will be pressure on countries that borrowed to balance higher repayment costs against continued need for social spending.

“We are entering a period where global interest rates will start going up as major central banks around the world start raising interest rates. That also then can create headwinds for the recovery for some emerging and developing economies,” Ms. Gopinath concluded.

A full copy of the report can be found at http://IMF.org/WEO