‘Largely Because Of Russia’: IMF Delivers Dour Outlook

Roll out the burning Earth collages.

A day after the World Bank slashed its outlook for the global economy, the IMF followed suit with the largest forecast cut since the onset of the pandemic.

The Fund on Tuesday said global growth will be just 3.6% in 2022, down markedly from the 4.4% projection delivered just three months ago (figure below). On Monday, the World Bank cut its own projection to 3.2% from 4.1%.

There’s no mystery here. “Global economic prospects have been severely set back, largely because of Russia’s invasion of Ukraine,” Pierre-Olivier Gourinchas, the IMF’s Director of Research, said Tuesday.

Gourinchas noted the obvious: The world was still reeling from the pandemic when war came to Europe. Inflation was already elevated and new lockdowns in China would’ve made things worse even in the absence of conflict. “The war adds to the series of supply shocks that have struck the global economy in recent years,” he wrote. “Like seismic waves, its effects will propagate far and wide — through commodity markets, trade and financial linkages.”

The figure (below) shows the composition of the downward revision from January’s forecast.

The IMF called inflation “a clear and present danger,” which is now amplified by war. The Fund said inflation is likely to remain elevated “for much longer.”

We’ve come a long way from “transitory.” And when it comes to US monetary policy settings, the Fed is still “a long way from neutral,” which means the world is staring down Putin’s war on Ukraine and Powell’s war on inflation. That’s a truly daunting set of challenges for an economy that’s still trying to dig itself out from under the worst public health crisis in a century.

To say the risks are skewed to the downside would be to materially understate the case. The list of things that could wrong (or get worse) is longer than train smoke, something the IMF made clear.

“The risk is rising that inflation expectations drift away from central bank inflation targets, prompting a more aggressive tightening response from policymakers,” Gourinchas wrote, in a blog post accompanying the new outlook. He also warned that the inexorable rise in food and fuel prices could “significantly increase the prospect of social unrest in poorer countries.”

As a reminder, the UN’s gauge of global food prices hit a record high in March (figure above).

Note that even rice, one of the few staple items for which prices hadn’t skyrocketed, is now set to get more expensive with fertilizer costs surging. As Humnath Bhandari, senior agricultural economist at the International Rice Research Institute, told Bloomberg this week, current conditions aren’t sustainable. “If this continues, then it’s inevitable,” he said, of higher prices. “It has to be reflected somewhere.”

Historically, sharply higher prices for necessities are often “reflected” in social unrest. The IMF suggested that’s where we are today.

I long ago gave up on the idea that anyone actually reads the IMF’s economic outlook, and considering many market participants’ perverse fascination with thinly-veiled, pro-Kremlin conspiracy narratives, April’s update from the Fund is likely to be viewed by many as biased. The new forecasts included a projected 8.5% contraction for the Russian economy this year, followed by a 2.3% slump in 2023. So, a multi-year recession.

Gourinchas underscored the sense of peril and panic that pervades and defines the macro zeitgeist. “Growth could slow down further while inflation could exceed our projections if, for instance, sanctions extend to Russian energy exports,” he said, adding that “continued spread of the virus could give rise to more lethal variants that escape vaccines, prompting new lockdowns and production disruptions.”