The International Monetary Fund has warned that global GDP growth will be almost halved in the next two years. In the latest edition of its biannual World Economic Outlook report, released on 19 April, the Fund revised its global growth projection for 2022 and 2023 to 3.6%, down from its January projections of 4.4% and 3.8% respectively - reflecting the impact of the Russia-Ukraine war that started in February.

These projections are already down from the estimated 6.1% growth seen in 2021.

Pierre-Olivier Gourinchas, IMF Chief Economist and director of the Fund's research department, pointed out that even before Russia invaded Ukraine, the global economy had not yet fully recovered from the pandemic and supply chains were still bottlenecked in many countries. The war and the subsequent sanctions on Russia, with its ramifications across Europe, and combined with new lockdowns in China, is worsening the situation.

"In this context, beyond its immediate and tragic humanitarian impact, the war will slow economic growth and increase inflation," he warned. The indirect impacts of the war on the European Union, where growth projections were revised down by 1.1%, are the second largest contributor to the slowdown. Russia in particular has a negative growth forecast due to sanctions, and even some of the advanced European countries are projected to see GDP growth on par or even lower than developing economies.

Inflation to stay for much longer than expected

The war has worsened existing commodity and fuel shortages, and the IMF now predicts that prices will rise further and stay high for longer, especially in the US and the emerging market and developing economies (EMDE). In fact, IMF's inflation predictions have only been revised upwards in the last two quarters, and the latest projections suggest that countries in the EMDE category, which are particularly exposed to global food prices, may not see prices return to their pre-war range even after inflation stabilises.

Image from the International Monetary Fund.

The report also highlights that the tight labour markets in advanced economies, particularly the US, are contributing to inflation as wages are pushed up - but real wages have fallen because pay increases are still not keeping up with consumer prices. At the same time, raising wages to match costs of living will simply increase inflationary pressures.

More problematically, the report states that inflation forecasts are "subject to high uncertainty" due to the extreme macro impact that the pandemic and the war continue to have on commodities and supply chains.

Most immediate priority to end the war, says IMF

The IMF has urged a peaceful resolution to the Russia-Ukraine war as soon as possible, not just to end the humanitarian crisis or to reduce the global economic impact, but also to ease the geopolitical tensions and polarisation that have resulted. As of now, the report singles out a worsening of the war as the most prominent negative risk to the global economy, one that exacerbates other negative risks such as increased social and geopolitical tensions and sets back efforts to tackle the global climate emergency.

The report also points out that due to the international and mutual nature of many of today's challenges, multilateral cooperation will be essential to tackling the ongoing problems, not just the war but its predecessors - the pandemic, the supply chain bottlenecks, inflation, and the climate emergency, to name the most serious.

"Just as a durable recovery from the pandemic was in sight, war broke out, potentially erasing recent gains," Gourinchas said in his commentary on the outlook. "The many challenges we face call for commensurate and concerted policy actions at the national and multilateral levels to prevent even worse outcomes and improve economic prospects for all."