New IMF chief economist weighs in on world economic outlook

Source: REUTERS. Pierre- Olivier Gourinchas, chief economist, International Monetary Fund (IMF).

These impacts are outlined in the World Economic Outlook report, released at the beginning of the Spring Meetings of the IMF and World Bank in Washington, DC by the IMF's new chief economist, Pierre-Olivier Gourinchas.

The 2022 Spring Meetings of the World Bank Group and the International Monetary Fund (IMF) and related ancillary events kicked off on 18 April and will conclude on 24 April 2022.

There is a significant downgrade to our growth projections for the global economy, Gourinchas reiterated.

The downgrade is from 4.4 percent as of January to 3.6 percent in the IMF's latest update: a 0.8 percentage point difference.

Gourinchas highlighted the causes: "There are three main reasons for this downgrade. First, the war invasion of Ukraine by Russia, which is increasing energy and commodity prices around the world, and is leading to less output and more inflation.

"Inflation is higher in most countries and is expected to persist longer. In addition, we have a slowdown of the Chinese economy with more frequent lockdowns due to Omicron that is weighing down, and then also elevated price pressures in many parts of the world leading central banks to tighten monetary policy controls.

We project economic downgrades for all regions. Ending the war in Ukraine, ensuring equitable access to COVID-19 tools, acting on climate change, reigning in inflation, and supporting vulnerable populations can improve the economic outlook. https://t.co/J6EVpjOcP3 #WEO pic.twitter.com/w8nd5OuBav

— IMF (@IMFNews) April 19, 2022

The downside risks of projections

"There are a number of important downside risks to our forecast," Gourinchas says. "First, let me start with the war itself. The conflict could escalate, the sanctions could become broader, and this clearly would weigh down on economic activity.

"Second, inflation pressures are building up. Some countries, like the US, have an inflation that is at their highest level in 40 years. There is a risk that this could persist and would call for more forceful action by central banks that would weigh down on output and economic activity.

"Third, the Covid-19 pandemic is still with us. We could see the emergence of new variants that are resistant to vaccines that would cause more lockdowns and disrupt global supply chains.

"Fourth, we could have - in the context of tightening policy rates around the world - more financial instability. Many countries might find that as their capital flows out, their currencies could start depreciating. This financial instability is another factor.

"Lastly, we have also the potential for social unrest given the increase in energy and food prices in many countries."

Recommendations going forward

Gourinchas advises policymakers to do everything they can to end the war now.

"Beyond that, think about monetary policy, fiscal policy and health policy," he says.

"For monetary policy, central banks need to act decisively to make sure that inflation expectations remain well anchored and not drifting away from central-bank targets. At the same time, they need to act in a nimble and data dependent way to support growth and make sure that the hiking cycle that should happen is not going to be disruptive.

"On fiscal policy, the trade-off is different. It's between rebuilding fiscal buffers on the one hand and protecting vulnerable populations that have been hit by the increase in energy and food prices."

Prioritising and addressing health needs

Gourinchas' advice is that in countries - where the health situation allows - support that was put in place in the last two years should be withdrawn and redirected to address vulnerable populations. "Implement targeted and temporary policies that will help them face higher prices for food and energy," he says. "This can take different forms, in the form of utility-bill discounts, in the form of subsidies for food and energy prices - as long as they are temporary and there are clear sunset clauses - and that all of these policies are inscribed in medium fiscal frameworks so as to ensure fiscal sustainability.

"Finally, on health policy, we need to implement a comprehensive toolkit with monitoring tests, vaccines and treatments to make sure that all countries can emerge from the Covid-19 pandemic. This will also require international donors to complete the funding for the international tools that are being put in place."

Funding needs are estimated to be around $23.4bn.