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Risks to global outlook overwhelmingly tilted to downside: IMF

August 3, 2022

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Risks to global outlook overwhelmingly tilted to downside: IMF

The International Monetary Fund has updated its World Economic Outlook in recent days, and the latest report makes for somewhat uncomfortable reading.

The International Monetary Fund has updated its World Economic Outlook in recent days, and the latest report makes for somewhat uncomfortable reading.

The tentative recovery in 2021 has been offset by increasingly gloomy developments in 2022, the IMF noted, due to risks beginning to materialise in a world economy already weakened by the pandemic.

Investors will know the current state of affairs: higher-than-expected inflation triggering tighter financial conditions; a worse-than-anticipated slowdown in China, reflecting COVID-19 outbreaks and lockdowns; and further negative spillovers from the war in Ukraine.

The risks to the outlook are overwhelmingly tilted to the downside, the IMF said, warning that a plausible scenario in which risks materialise, inflation rises further and global growth declines to 2.6% and 2% in 2022 and 2023 would put growth in the bottom 10% of outcomes since 1970.

“With increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers,” the IMF said. “Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them.”

As if on cue, the Reserve Bank of Australia yesterday announced a fourth successive monthly increase in interest rates, hitting the nation’s homeowners despite signs the RBA’s aggressive tightening of monetary policy may be slowing the jobs market.

In its monthly meeting, the RBA board lifted the cash rate by another half a percentage point to a six-year high of 1.85% – the first time it has lifted interest rates at four consecutive meetings since the introduction of its 2-3% inflation target in 1990.

Globally, the IMF reports the baseline forecast is for growth to slow from 6.1% last year to 3.2% in 2022 – 0.4 percentage points lower than in the IMF’s April 2022 World Economic Outlook.

Inflation has also been revised, due to food and energy prices as well as lingering supply-demand imbalances, and is anticipated to reach 6.6% in advanced economies and 9.5% in emerging market and developing economies this year – 0.9 and 0.8 pp higher, respectively.

In 2023, disinflationary monetary policy is expected to bite, with global output growing by just 2.9%.

Back on the home front, Australia’s growth rate remains strong, with the country set to become the world’s 12th-largest economy in 2023.

Nominal GDP is expected to be around $2.5 trillion (US$1.8 trillion). Australia is home to just 0.3% of the world’s population, but accounts for 1.7% of the global economy.

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