The world economy is slowing considerably

Over the past few weeks, a number of international organisations have begun slashing their forecasts for global economic growth.  It is not common for such reputable organisations to revise down sharply their projections for economic growth only one quarter into the calendar year.  However, this time round, this was deemed appropriate in view of the disruptions to global energy, food, and commodity supplies from the war in Ukraine and the repercussions of China’s sweeping lockdowns to contain a renewed coronavirus outbreak.

The latest to sound the alarm was the International Monetary Fund (IMF) which in its latest World Economic Outlook, published last Tuesday, downgraded the outlook for the world economy this year and next.  The downgrade for this year impacted 86% of its 190-member countries, resulting in a decline of almost one percentage point in global growth for 2022 – from 4.4% to 3.6%  This represents a steep drop from the 6.1% registered last year, most of which is associated with the detrimental economic effects of Russia’s invasion of Ukraine.  The IMF also expects the world’s economy to grow by 3.6% in 2023, slightly lower than the 3.8% it forecast in January.

The war has disrupted the supply of corn, gas, metals, oil and wheat, as well as pushing up the price of critical inputs such as fertilizer.  These developments have prompted warnings of a looming global food crisis.  Given the scale of the disruptions, it would not be a surprise if the IMF issued a further downward revision to its growth projections – particularly for Europe – later this year.

The war and the darkening outlook, came just as the global economy appeared to be shaking off the impact of the highly infectious omicron variant.  The IMF now expected that the sanctions imposed on Russia will shrink the economy by 8.5% this year which would represent just a quarter of the 35% slump expected in its neighbouring country Ukraine.

US economic growth is expected to drop to 3.7% this year from 5.7% in 2021, which has been the fastest growth since 1984.  The new forecast marks a downgrade from the 4% the IMF had predicted at the beginning of the year.  A big influence on US growth this year will be the Federal Reserve’s path of interest rate increases, meant to combat resurgent inflation, and an economic slowdown in key American trading partners.

Europe, which is heavily dependent on Russian energy will bear the brunt of the economic fallout from the Russia-Ukraine war.  For the Euro Area, the IMF forecasts collective growth of 2.8% in 2022.  That represents a sharp drop from the 3.9% it expected in January and from 5.3% last year.

The IMF expects the growth of the Chinese economy to decelerate to 4.4% this year, almost half the growth of 8.1% registered in 2021.  China’s zero-Covid strategy has meant draconian lockdowns in busy commercial cities like Shanghai and Shenzhen.

The IMF forecasts a 5.7% jump in consumer prices in the world’s advanced economies this year, the most since 1984.  In the US and in the Euro Area, inflation is already running at around four times the rate targeted by both the Federal Reserve and the European Central Bank.  Monetary authorities worldwide are raising interest rates to counter rising prices, a move that could choke off economic growth by driving up prices of oil, natural gas and other commodities as the Russia-Ukraine war has made their task of fighting inflation while preserving the economic recovery even trickier.

Disclaimer: This article was written by Stephen Borg, Head of Private Clients at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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