The emergence of new COVID-19 variants and rising inflation have thrust the global economy into a “weaker position than previously expected,” the International Monetary Fund said Tuesday.
In its updated World Economic Outlook report, the IMF now expects the global economy to grow by 4.4% in 2022, half a percentage point lower than its last round of forecasts in October.
The downgrade is tied largely to dampened expectations for growth in the two largest economies: the U.S. and China.
In the United States, the IMF said the collapse of President Joe Biden’s Build Back Better fiscal package, alongside an earlier pullback in easy money policies from the Federal Reserve, led to a 1.2% downward revision. The U.S. economy is now expected to expand by 4.0% this year, compared to the 5.2% it had originally forecast in October.
“Our expectation is that growth will slow — as it should — to prevent the economy from overheating any more, but it should be a fairly well-behaved transition down,” IMF Chief Economist Gita Gopinath told Yahoo Finance in an interview Tuesday.
In China, the IMF pointed to shutdowns related to its zero-tolerance COVID-19 policies in lowering growth expectations by 0.8%. The report also pointed to financial stresses in the country’s property sector, as underscored by the repayment troubles of Chinese conglomerate Evergrande, as another reason for the slowdown. The IMF now expects the Chinese economy to grow by 4.8% this year, compared to 5.6% as forecast in October.
Gopinath said the global economy at large continues to “remain in the grip of the pandemic,” expressing concern that emerging markets — many of which have not recovered to the degree of the U.S. — will remain farther behind.
Complicating the picture on global growth: inflation. Higher energy and food prices around the world remain a risk, with Europe, China, and other advanced economies also experiencing broad-based inflationary pressures.
The IMF said the U.S. is seeing higher wage growth alongside higher inflation, which is good for workers but runs the risk of a wage-price spiral that could further exacerbate inflation.
Gopinath said she does not currently see such a spiral taking place, but said the Federal Reserve should tighten its easy money policies to prevent one from happening.
“It makes absolute sense to start raising interest rates,” Gopinath said.
Rising prices have already pushed emerging market economies to start tightening, with the hopes that higher interest rates (and thus, borrowing costs) will dampen the demand that may be fueling higher prices.
Brazil, Mexico, and Russia are among the countries where monetary policymakers have already raised interest rates.
In the U.S., the Federal Reserve appears to be positioning itself for a “liftoff” in interest rates in March — which would mark the first interest rate increase since the central bank slashed its policy rate to zero in March 2020.
Doing so may curb inflation, but the IMF warns it could also introduce volatility into global markets.
“As advanced economies lift policy rates, risks to financial stability and emerging market and developing economies’ capital flows, currencies, and fiscal positions — especially with debt levels having increased significantly in the past two years — may emerge,” the IMF’s report reads.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.