IMF slashes global growth output as inflation, omicron threaten recovery

Red-hot inflation and the fast-spreading omicron variant are hindering the global economic recovery from the coronavirus pandemic, the International Monetary Fund warned on Tuesday.

The Washington-based IMF projected in its latest World Economic Outlook that global domestic gross product will grow by 4.4% this year – 0.5 percentage points lower than its October estimate.

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"The global economy is entering 2022 in a weaker position than anticipated," the report said, citing an unprecedented increase in COVID-19 caseloads worldwide and rising cost pressures. 

The slowdown is even more pronounced in the U.S. and China, the IMF said, though it warned that few countries will be spared. The organization slashed its growth estimates for the U.S. to 4% in 2022, down 1.2 percentage points from October. It marked the biggest reduction suffered by any G-7 nation and comes as the Federal Reserve prepares to begin aggressively normalizing policy in order to combat rising inflation. 

The IMF also reduced its growth outlooks for both China by 0.8 percentage points, with Beijing expected to now grow by 4.8% this year as the government enforces a strict "zero-COVID" policy and the country grapples with "projected financial stress" among its real estate developers.

Inflation has accelerated as the economy recovers from the brief but extremely severe recession in 2020, and is expected to remain elevated for "longer than envisioned" amid ongoing supply-chain disruptions and high energy prices, the IMF said. However, the organization predicted that prices will begin to subside as "supply-demand imbalances wane in 2022 and monetary policy in major economies responds." 

The dramatic rise in consumer prices over the past 12 months – in December, inflation hit a fresh 40-year high – has forced the Federal Reserve to dramatically shift its policy stance, including rapidly slowing its bond purchases, ending the buying program earlier than expected and setting the table for a March interest rate hike.

While Chairman Jerome Powell initially predicted that inflation would be transitory and would dissipate as pandemic-induced disruptions in the supply chain abated, he has since acknowledged the price spike has been higher and longer-lasting than the Fed anticipated.

"Monetary policy is at a critical juncture in most countries," Gita Gopinath, chief economist at the IMF, wrote in an accompanying blog. "Where inflation is broad based alongside a strong recovery, like in the United States, or high inflation runs the risk of becoming entrenched, as in some emerging market and developing economies and advanced economies, extraordinary monetary policy support should be withdrawn." 

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The IMF raised its growth outlook for 2023 by 0.2 percentage points to 3.8%, but warned that the estimate relies on the equal distribution of vaccines worldwide excludes the emergence of any new COVID-19 variant. 

"The emphasis on an effective global health strategy is more salient than ever," the organization said.