Title Page
INTERNATIONAL MONETARY FUND
WORLD ECONOMIC OUTLOOK
War Sets Back the Global Recovery
2022
APR
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©2022 International Monetary Fund
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Names: International Monetary Fund.
Title: World economic outlook (International Monetary Fund)
Other titles: WEO | Occasional paper (International Monetary Fund) | World economic and financial surveys.
Description: Washington, DC : International Monetary Fund, 1980- | Semiannual | Some issues also have thematic titles. | Began with issue for May 1980. | 1981–1984: Occasional paper / International Monetary Fund, 0251–6365 | 1986-: World economic and financial surveys, 0256–6877.
Identifiers: ISSN 0256–6877 (print) | ISSN 1564–5215 (online)
Subjects: LCSH: Economic development—Periodicals. | International economic relations— Periodicals. | Debts, External—Periodicals. | Balance of payments—Periodicals. | International finance—Periodicals. | Economic forecasting—Periodicals.
Classification: LCC HC10.W79
HC10.80
ISBN 978–1-61635–942-3 (English Paper)
979–8-40020–525-5 (English ePub)
979–8-40020–530-9 (English Web PDF)
The World Economic Outlook (WEO) is a survey by the IMF staff published twice a year, in the spring and fall. The WEO is prepared by the IMF staff and has benefited from comments and suggestions by Executive Directors following their discussion of the report on April 11, 2022. The views expressed in this publication are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Directors or their national authorities.
Recommended citation: International Monetary Fund. 2022. World Economic Outlook: War Sets Back the Global Recovery. Washington, DC, April.
Errata
May 10, 2022
Annex Table 1.1.2. Asian and Pacific Economies: The Current Account Balance data for India was incorrect in the originally published report. The Current Account Balance projections listed in this table for 2022 and 2023 have now been corrected to –2.9 and –2.5, respectively.
Table A12. Emerging Market and Developing Economies: The Current Account Balance data for India was incorrect in the originally published report. The Current Account Balance projections listed in this table for 2022, 2023, and 2024 have now been corrected to –2.9, –2.5, and –2.3, respectively.
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Contents
Assumptions and Conventions
Further Information
Data
Preface
Foreword
Executive Summary
Chapter 1. Global Prospects and Policies
War Slows the Recovery
Fragmentation and Fragility Set to Slow Growth during 2022–23
Forecast Revisions
International Implications of the War in Ukraine
Elevated Inflation Expected to Persist for Longer
Rising Interest Rates: Implications for Emerging Market and Developing Economies
Economic Slack to Narrow in the Medium Term; Significant Scarring Expected
Risks Are Large and to the Downside
Policies to Sustain the Recovery and Improve Medium-Term Prospects
Scenario Box
Box 1.1. The Puzzle of Tight Labor Markets: US and UK Examples
Box 1.2. Determinants of Neutral Interest Rates and Uncertain Prospects
Special Feature: Market Developments and the Pace of Fossil Fuel Divestment
References
Chapter 2. Private Sector Debt and the Global Recovery
Introduction
Private Sector Leverage during the Pandemic
Private Debt and the Business Cycle
Countercyclical Policy Effects amid High Private Debt
Conclusions and Policy Implications
Box 2.1. Inequality and Public Debt Sustainability
Box 2.2. Rising Household Indebtedness, the Global Saving Glut of the Rich, and the Natural Interest Rate
References
Chapter 3. A Greener Labor Market: Employment, Policies, and Economic Transformation
Introduction
Environmental Properties of Jobs: Definitions and Stylized Facts
Environmental Properties of Job Transitions
Labor Markets and Environmental Policies: Empirical and Model-Based Analyses
Conclusions
Box 3.1. The Geography of Green- and Pollution-Intensive Jobs: Evidence from the United States
Box 3.2. A Greener Post-COVID Job Market?
References
Chapter 4. Global Trade and Value Chains during the Pandemic
Introduction
Drivers of Trade during the Pandemic
International Spillovers from Pandemic Containment Policies
Resilience in GVCs
Policy Implications
Box 4.1. Effects of Global Supply Disruptions during the Pandemic
Box 4.2. The Impact of Lockdowns on Trade: Evidence from Shipping Data
Box 4.3. Firm-Level Trade Adjustment to the COVID-19 Pandemic in France
References
Statistical Appendix
Assumptions
What’s New
Data and Conventions
Country Notes
Classification of Countries
General Features and Composition of Groups in the World Economic Outlook Classification
Table A. Classification by World Economic Outlook Groups and Their Shares in Aggregate GDP, Exports of Goods and Services, and Population, 2021
Table B. Advanced Economies by Subgroup
Table C. European Union
Table D. Emerging Market and Developing Economies by Region and Main Source of Export Earnings
Table E. Emerging Market and Developing Economies by Region, Net External Position, Heavily Indebted Poor Countries, and Per Capita Income Classification
Table F. Economies with Exceptional Reporting Periods
Table G. Key Data Documentation
Box A1. Economic Policy Assumptions Underlying the Projections for Selected Economies
List of Tables
Output (Tables A1–A4)
Inflation (Tables A5–A7)
Financial Policies (Table A8)
Foreign Trade (Table A9)
Current Account Transactions (Tables A10–A12)
Balance of Payments and External Financing (Table A13)
Flow of Funds (Table A14)
Medium-Term Baseline Scenario (Table A15)
World Economic Outlook, Selected Topics
IMF Executive Board Discussion of the Outlook, April 2022
Tables
Table 1.1. Overview of the World Economic Outlook Projections
Table 1.2. Overview of the World Economic Outlook Projections at Market Exchange Rate Weights
Annex Table 1.1.1. European Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.2. Asian and Pacific Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.3. Western Hemisphere Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.4. Middle East and Central Asia Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.5. Sub-Saharan African Economies: Real GDP, Consumer Prices, Current Account Balance, and Unemployment
Annex Table 1.1.6. Summary of World Real per Capita Output
Online Tables—Statistical Appendix
Table B1. Advanced Economies: Unemployment, Employment, and Real GDP per Capita
Table B2. Emerging Market and Developing Economies: Real GDP
Table B3. Advanced Economies: Hourly Earnings, Productivity, and Unit Labor Costs in Manufacturing
Table B4. Emerging Market and Developing Economies: Consumer Prices
Table B5. Summary of Fiscal and Financial Indicators
Table B6. Advanced Economies: General and Central Government Net Lending/Borrowing and General Government Net Lending/Borrowing Excluding Social Security Schemes
Table B7. Advanced Economies: General Government Structural Balances
Table B8. Emerging Market and Developing Economies: General Government Net Lending/Borrowing and Overall Fiscal Balance
Table B9. Emerging Market and Developing Economies: General Government Net Lending/Borrowing
Table B10. Selected Advanced Economies: Exchange Rates
Table B11. Emerging Market and Developing Economies: Broad Money Aggregates
Table B12. Advanced Economies: Export Volumes, Import Volumes, and Terms of Trade in Goods and Services
Table B13. Emerging Market and Developing Economies by Region: Total Trade in Goods
Table B14. Emerging Market and Developing Economies by Source of Export Earnings: Total Trade in Goods
Table B15. Summary of Current Account Transactions
Table B16. Emerging Market and Developing Economies: Summary of External Debt and Debt Service
Table B17. Emerging Market and Developing Economies by Region: External Debt by Maturity
Table B18. Emerging Market and Developing Economies by Analytical Criteria: External Debt by Maturity
Table B19. Emerging Market and Developing Economies: Ratio of External Debt to GDP
Table B20. Emerging Market and Developing Economies: Debt-Service Ratios
Table B21. Emerging Market and Developing Economies, Medium-Term Baseline Scenario: Selected Economic Indicators
Figures
Figure 1.1. Global Activity Indicators
Figure 1.2. Inflation Trends
Figure 1.3. Monetary and Financial Conditions
Figure 1.4. Fiscal Stance, 2020–23
Figure 1.5. New Confirmed COVID-19 Deaths
Figure 1.6. International Cereal Prices
Figure 1.7. Global Oil Intensity and Oil Revenue Share
Figure 1.8. Trade Exposures to Russia and Ukraine, 2020
Figure 1.9. Global Value Chain Participation, 2018
Figure 1.10. Ratio of Banks’ Exposure to Russia to Total Assets, end-September 2021
Figure 1.11. Changes in Inflation Drivers
Figure 1.12. Core Inflation versus Private Domestic Demand
Figure 1.13. Goods and Services Inflation
Figure 1.14. Changes in Inflation Expectations: January 21–January 22
Figure 1.15. Sovereign Spreads at Tipping Points
Figure 1.16. Emerging Market and Developing Economy Vulnerabilities
Figure 1.17. Medium-Term Prospects: Output and Employment
Figure 1.18. Potential GDP
Figure 1.19. Correlates of Projected Output Revisions to Vaccination
Figure 1.20. Current Account and International Investment Positions
Figure 1.21. Fraction of Countries with a Major Unrest Event
Figure 1.22. Real Policy Rates
Figure 1.23. Public External Debt
Figure 1.24. Changes in Emissions in 2030 versus 2021 under NDCs and Warming Scenarios
Scenario Figure 1.1. Downside Scenario
Figure 1.1.1. Employment Rate and Labor Market Tightness
Figure 1.1.2. Inactivity Rates
Figure 1.1.3. United States Wage Growth and Tightness across Sectors
Figure 1.2.1. Estimated Neutral Rates Since 1980
Figure 1.2.2. Neutral Rate Factors
Figure 1.SF.1. Commodity Market Developments
Figure 1.SF.2. European Gas Inventory and Gas Price
Figure 1.SF.3. Oil and Gas Investment as Share of World GDP
Figure 1.SF.4. Price Elasticity of Global Oil and Gas Capital Expenditure
Figure 1.SF.5. Climate Policy and Energy Transition Indicators
Figure 1.SF.6. Counterfactuals for Oil and Gas Capital Expenditure
Figure 1.SF.7. Oil Prices Rise in a Net Zero Emissions Scenario Driven by Supply Policies, Decline when Driven by Demand Policy
Figure 1.SF.8. Production in High-Cost Regions Would Be under Pressure in Demand-Side Scenario, Uncertain in Supply-Side Scenario
Figure 2.1. Rapidly Mounting Private Debt
Figure 2.2. Advanced Economies: Aggregate Household Balance Sheets
Figure 2.3. Correlation between Wealth and Income Inequality
Figure 2.4. Change in Debt-to-Income Ratio by Income Decile in 2020
Figure 2.5. Uneven COVID-19 Impact on Nonfinancial Corporations’ Revenue Growth
Figure 2.6. Exposure to Contingent Liabilities Associated with Credit Guarantees (50 Percent Scenario)
Figure 2.7. Heterogeneous Effect on Nonfinancial Corporation Balance Sheets
Figure 2.8. Concentration of Nonfinancial Corporation Vulnerabilities
Figure 2.9. Consumption and Investment Responses to Household and Nonfinancial Corporate Excess Credit
Figure 2.10. Fiscal Position and Deleveraging
Figure 2.11. Advanced Economies: Wealth Inequality and Deleveraging
Figure 2.12. The Role of Vulnerable Firms
Figure 2.13. The Role of Effective Insolvency Frameworks
Figure 2.14. Output Sensitivity to Fiscal Consolidation as Function of Private Debt
Figure 2.15. Effects of Macro Policy Tightening on Heterogeneous Households and Firms
Figure 2.1.1. Effect of Income Inequality on the Sustainable Level of Debt
Figure 2.1.2. Debt Denomination
Figure 2.2.1. Saving by Income Group
Figure 2.2.2. Absorption of Accumulated Saving
Figure 3.1. Evolution of Average Carbon Emissions Intensity
Figure 3.2. Cross-Country Distribution and Evolution of Green- and Pollution-Intensive Occupations and Carbon Emissions per Worker
Figure 3.3. Sectoral Differences in the Distribution of Green, Pollution, and Emissions Intensities in Employment
Figure 3.4. Environmental Properties of Jobs by Worker Characteristics
Figure 3.5. Earnings and the Environmental Properties of Jobs
Figure 3.6. Job Transition Rates and the Environmental Properties of Past Jobs
Figure 3.7. Annual Probability among Job Switchers of Transitioning into a Green-Intensive or Neutral Job
Figure 3.8. Estimated Effects of Environmental Policy Stringency
Figure 3.9. Estimated Effects of Environmental Policy Stringency Conditional on Labor Market Features
Figure 3.10. Model Simulations of the Green Economic Transformation with a Comprehensive Policy Package in an Advanced Economy
Figure 3.11. Model Simulations of the Green Economic Transformation with a Comprehensive Policy Package in an Emerging Market Economy
Figure 3.1.1. Geographic Distribution of Green and Pollution Intensities across US Counties
Figure 3.2.1. Cross-Country Evolution of Green Hiring Rates and Job Postings
Figure 4.1. Global Import Volume and Lockdown Stringency
Figure 4.2. Trade Patterns around Global Recessions: Goods and Services Import Volume
Figure 4.3. Imports of Commercial Services by Main Sectors
Figure 4.4. Volatility of Trade in GVC-Intensive Industries versus Non-GVC-Intensive Industries Early in the Pandemic
Figure 4.5. Average Forecast Errors of the Growth in Imports from the Import Demand Model
Figure 4.6. Factors Associated with the Demand Model’s Forecast Errors for 2020
Figure 4.7. Change in Imports and Partner Countries’ Lockdown Stringency
Figure 4.8. Semielasticity of the Oxford COVID-19 Government Response Stringency Index
Figure 4.9. Changes in Regions’ Market Shares of GVC-Related Products
Figure 4.10. Room to Diversify the Sourcing of Intermediates
Figure 4.11. Gains from Diversification Following a Supply Disruption in a Large Supplier Country
Figure 4.12. Gains from Diversification under Shocks to Total Factor Productivity
Figure 4.13. Gains from Substitutability Following a Supply Disruption in a Large Supplier Country
Figure 4.14. Nontariff Barriers Index
Figure 4.1.1. Global Goods Trade and Supply Chain Pressures
Figure 4.1.2. Foreign Suppliers, Production, and Delivery Delays in the United States
Figure 4.1.3. Trade in Automobiles and Semiconductors
Figure 4.2.1. Response of Bilateral Import Growth to Exporter Lockdowns
Figure 4.3.1. Impact of Supply Chain Upstreamness, Automation, and Inventories on Trade Adjustment
Assumptions and Conventions
A number of assumptions have been adopted for the projections presented in the World Economic Outlook (WEO). It has been assumed that real effective exchange rates remained constant at their average levels during February 22, 2022 to March 22, 2022, except for those for the currencies participating in the European exchange rate mechanism II, which are assumed to have remained constant in nominal terms relative to the euro; that established policies of national authorities will be maintained (for specific assumptions about fiscal and monetary policies for selected economies, see Box A1 in the Statistical Appendix); that the average price of oil will be $106.83 a barrel in 2022 and $92.63 a barrel in 2023; that the three-month government bond yield for the United States will average 0.9 percent in 2022 and 2.4 percent in 2023, for the euro area will average –0.7 percent in 2022 and 0.0 percent in 2023, and for Japan will average 0.0 percent in 2022 and 0.1 percent in 2023; and that the 10-year government bond yield for the United States will average 2.6 percent in 2022 and 3.4 percent in 2023, for the euro area will average 0.4 percent in 2022 and 0.6 percent in 2023, and for Japan will average 0.3 percent in 2022 and 0.4 percent in 2023. These are, of course, working hypotheses rather than forecasts, and the uncertainties surrounding them add to the margin of error that would, in any event, be involved in the projections. The estimates and projections are based on statistical information available through April 8, 2022.
The following conventions are used throughout the WEO:
… to indicate that data are not available or not applicable;
– between years or months (for example, 2021–22 or January–June) to indicate the years or months covered, including the beginning and ending years or months; and
/ between years or months (for example, 2021/22) to indicate a fiscal or financial year.
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refers to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
Data refer to calendar years, except in the case of a few countries that use fiscal years. Please refer to Table F in the Statistical Appendix, which lists the economies with exceptional reporting periods for national accounts and government finance data for each country.
For some countries, the figures for 2021 and earlier are based on estimates rather than actual outturns. Please refer to Table G in the Statistical Appendix, which lists the latest actual outturns for the indicators in the national accounts, prices, government finance, and balance of payments indicators for each country.
What is new in this publication:
For Ecuador, fiscal sector projections are excluded from publication for 2022–27 because of ongoing program review discussions.
Ethiopia’s forecast data, which were previously omitted due to an unusually high degree of uncertainty, are now included.
Fiji’s fiscal data and forecasts are now presented on a fiscal year basis.
For Tunisia, projections are excluded from publication for 2023–27 because of ongoing technical discussions pending potential program negotiations.
For Ukraine, all projections for 2022–27 except Real GDP are omitted due to an unusually high degree of uncertainty. Real GDP is projected through 2022.
Venezuela redenominated its currency on October 1, 2021, by replacing 1,000,000 bolívares soberano (VES) with 1 bolívar digital (VED).
Beginning with the April 2022 WEO, the interest rate assumptions are based on the three-month and 10-year government bond yields, which replace the London interbank offered rates. See the above for more details.
In the tables and figures, the following conventions apply:
If no source is listed in tables and figures, data are drawn from the WEO database.
When countries are not listed alphabetically, they are ordered on the basis of economic size.
Minor discrepancies between sums of constituent figures and totals shown reflect rounding.
Composite data are provided for various groups of countries organized according to economic characteristics or region. Unless noted otherwise, country group composites represent calculations based on 90 percent or more of the weighted group data.
The boundaries, colors, denominations, and any other information shown on maps do not imply, on the part of the IMF, any judgment on the legal status of any territory or any endorsement or acceptance of such boundaries.
As used in this report, the terms “country” and “economy” do not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Further Information
Corrections and Revisions
The data and analysis appearing in the World Economic Outlook (WEO) are compiled by the IMF staff at the time of publication. Every effort is made to ensure their timeliness, accuracy, and completeness. When errors are discovered, corrections and revisions are incorporated into the digital editions available from the IMF website and on the IMF eLibrary (see below). All substantive changes are listed in the online table of contents.
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Preface
The analysis and projections contained in the World Economic Outlook are integral elements of the IMF’s surveillance of economic developments and policies in its member countries, of developments in international financial markets, and of the global economic system. The survey of prospects and policies is the product of a comprehensive interdepartmental review of world economic developments, which draws primarily on information the IMF staff gathers through its consultations with member countries. These consultations are carried out in particular by the IMF’s area departments—namely, the African Department; Asia and Pacific Department; European Department; Middle East and Central Asia Department; and Western Hemisphere Department— together with the Strategy, Policy, and Review Department; the Monetary and Capital Markets Department; and the Fiscal Affairs Department.
The analysis in this report was coordinated in the Research Department under the general direction of Pierre-Olivier Gourinchas, Economic Counsellor and Director of Research. The project was directed by Petya Koeva Brooks, Deputy Director, Research Department, and Malhar Nabar, Division Chief, Research Department. Shekhar Aiyar, Division Chief, Research Department and Head of the Spillovers Task Force, supervised Chapter 4.
The primary contributors to this report are Silvia Albrizio, Jorge Alvarez, Philip Barrett, John Bluedorn, Christian Bogmans, Sonali Das, Niels-Jakob Hansen, Christoffer Koch, Toh Kuan, Ting Lan, Davide Malacrino, Adil Mohommad, Jean-Marc Natal, Diaa Noureldin, Andrea Pescatori, Andrea Presbitero, Ervin Prifti, Galen Sher, Ippei Shibata, Martin Stuermer, Marina Mendes Tavares, Nico Valckx, and Philippe Wingender.
Other contributors include Itai Agur, Cian Allen, Gavin Asdorian, Srijoni Banerjee, Eric Bang, Katharina Bergant, Rachel Brasier, Mariya Brussevich, Diego Cerdeiro, Shan Chen, Yaniv Cohen, Pablo Gonzalez Dominguez, Wenchuan Dong, Angela Espiritu, Rebecca Eyassu, Julia Estefania Flores, Francesco Grigoli, Jinjin He, Youyou Huang, Benjamin Hunt, Piyusha Khot, Christina Kolerus, Andras Komaromi, Siddharth Kothari, Eduard Laurito, Jungjin Lee, Daniel Leigh, Andrei Levchenko, Yang Liu, Rui Mano, Susanna Mursula, Yousef F. Nazer, Savannah Newman, Anh Dinh Minh Nguyen, Cynthia Nyanchama Nyakeri, Emory Oakes, Myrto Oikonomou, Chris Papageorgiou, Ilse Peirtsegaele, Clarita Phillips, Carlo Pizzinelli, Josef Platzer, Rafael Portillo, Evgenia Pugacheva, Yiyuan Qi, Max Rozycki, Marika Santoro, Alexandre Sollaci, Philip Stokoe, Nour Tawk, Robin Tietz, Nicholas Tong, Pauline Wibaux, Yarou Xu, Hannah Leheng Yang, Jiaqi Zhao, Canran Zheng, and Bryan Zou.
Joseph Procopio from the Communications Department led the editorial team for the report, with assistance from Lucy Scott Morales, James Unwin, Michael Harrup, Nancy Morrison, Harold Medina, and TalentMEDIA Services.
The analysis has benefited from comments and suggestions by staff members from other IMF departments, as well as by Executive Directors following their discussion of the report on April 11, 2022. However, estimates, projections, and policy considerations are those of the IMF staff and should not be attributed to Executive Directors or to their national authorities.
Foreword
Global economic prospects have worsened significantly since our last World Economic Outlook forecast in January. At the time, we had projected the global recovery to strengthen from the second quarter of this year after a short-lived impact of the Omicron variant. Since then, the outlook has deteriorated, largely because of Russia’s invasion of Ukraine—causing a tragic humanitarian crisis in Eastern Europe—and the sanctions aimed at pressuring Russia to end hostilities.
This crisis unfolds while the global economy was on a mending path but had not yet fully recovered from the COVID-19 pandemic, with a significant divergence between the economic recoveries of advanced economies and emerging market and developing ones. In addition to the war, frequent and wider-ranging lockdowns in China—including in key manufacturing hubs—have also slowed activity there and could cause new bottlenecks in global supply chains. Higher, broader, and more persistent price pressures also led to a tightening of monetary policy in many countries. Overall risks to economic prospects have risen sharply and policy trade-offs have become ever more challenging.
Beyond the immediate humanitarian impacts, the war will severely set back the global recovery, slowing growth and increasing inflation even further. This report projects global growth at 3.6 percent in 2022 and 2023—0.8 and 0.2 percentage points lower than in the January forecast, respectively. The downgrade largely reflects the war’s direct impacts on Russia and Ukraine and global spillovers.
Both Russia and Ukraine are projected to experience large GDP contractions in 2022. The severe collapse in Ukraine is a direct result of the invasion, destruction of infrastructure, and exodus of its people. In Russia, the sharp decline reflects the impact of the sanctions with a severing of trade ties, greatly impaired domestic financial intermediation, and loss of confidence.
The economic effects of the war are spreading far and wide—like seismic waves that emanate from the epicenter of an earthquake—mainly through commodity markets, trade, and financial linkages. Because Russia is a major supplier of oil, gas, and metals, and, together with Ukraine, of wheat and corn, the current and anticipated decline in the supply of these commodities has already driven their prices up sharply. Europe, Caucasus and Central Asia, Middle East and North Africa, and sub-Saharan Africa are most affected. The food and fuel price increases will hurt lower-income households globally—including in the Americas and Asia.
As Chapter 1 details, the war adds to the series of supply shocks that have struck the global economy over the course of the pandemic, contributing to more shortages beyond the energy and agricultural sectors. Trough closely integrated global supply chains, production disruptions in one country can very quickly cascade globally. Firms in Russia and Ukraine supply specialized inputs, and shortfalls in some of those inputs are already having impacts on European car manufacturers. Some countries in eastern Europe and central Asia have large direct trade and remittance links with Russia. Activity in those economies is expected to suffer. The displacement of more than 4 million Ukrainian people to neighboring countries, especially Poland but also Romania, Moldova, and Hungary, will also add to economic pressures in the region.
Even prior to the war, inflation had surged in many economies because of soaring commodity prices and pandemic-induced supply-demand imbalances. Some emerging markets and developed economies’ central banks, such as the US Federal Reserve and those in Latin America, had already come under pressure before the war, bringing forward the timing of their monetary policy tightening. War-related supply shortages will greatly amplify those pressures, notably through increases in the price of energy, metals, and food. Although bottlenecks are expected to eventually ease as production elsewhere responds to higher prices and new capacity becomes operational, supply shortages in some sectors are expected to last into 2023. As a result, inflation is now projected to remain elevated for much longer than in our previous forecast, in both advanced and emerging market and developing economies.
In many countries, inflation has become a central concern. In some advanced economies, including the United States and some European countries, it has reached its highest level in more than 40 years, in the context of tight labor markets. There is a rising risk that inflation expectations become de-anchored, prompting a more aggressive tightening response from central banks. In emerging market and developing economies, increases in food and fuel prices could significantly increase the risk of social unrest.
Immediately after the invasion, capital outflows increased markedly from emerging market and developing economies, tightening financial conditions for vulnerable borrowers and net importers of commodities, and putting downward pressure on the currencies of the most exposed countries. So far, this repricing has been mostly orderly. Yet the April 2022 Global Financial Stability Report highlights several financial fragility risks. A wider range of emerging market economies could come under pressure if the pace of global monetary tightening accelerates further, especially in the United States, or if financial markets start to reprice more aggressively, which would further weigh on the global outlook.
On the fiscal side, policy space was already eroded in many countries by necessary COVID-related spending. Debt levels have risen significantly, and extraordinary fiscal support was expected to be removed in 2022–23. The war and the impending increase in global interest rates will further reduce fiscal space in many countries, especially oil- and food-importing emerging market and developing economies. The analysis in Chapter 2 shows that non-financial corporate and household leverage increased in many countries during the pandemic, as many governments helped maintain access to credit. Looking ahead, this may create some credit market vulnerabilities as interest rates and risk premia rise, with implications for financial stability.
The war has also increased the risk of a more permanent fragmentation of the world economy into geopolitical blocks with distinct technology standards, cross-border payment systems, and reserve currencies. Such a tectonic shift would entail high adjustment costs and long-run efficiency losses as supply chains and production networks are reconfigured. It also represents a major challenge to the rules-based framework that has governed international and economic relations for the last 70 years.
Because of the unprecedented nature of the shock, we highlight that the uncertainty around these projections is considerable, well-beyond the usual range. Growth could slow significantly more while inflation could turn out higher than expected if, for instance, sanctions aimed at ending the war extend to an even broader volume of Russian energy and other exports. These possibilities are explored in more detail in a Scenario Box in Chapter 1. Moreover, the pandemic is still with us. The continued spread of the virus could give rise to more lethal variants that escape vaccines or immunity from past infections, prompting new lockdowns and production disruptions.
In this difficult and uncertain environment, effective national-level policies and multilateral efforts have an ever more important role in shaping economic outcomes. Central banks will need to adjust their monetary stances even more aggressively should medium- or long-term inflation expectations start drifting from central bank targets or core inflation remains persistently elevated. As advanced economy central banks tighten policy and interest rates rise in those countries, emerging market and developing economies could face a further withdrawal of capital and currency depreciations that increase inflation pressures. Clear central bank communications on the drivers of inflation and forward guidance on the outlook for monetary policy, supplemented—when appropriate—with capital flow management measures in line with the IMF’s revised Institutional View on capital flows, will be essential to minimize the risk of disruptive adjustments.
Although several economies will need to consolidate their fiscal balances, this should not impede governments from providing well-targeted support for refugees displaced by conflict, households squeezed by higher food and fuel prices, and those affected by the pandemic, as argued in the April 2022 Fiscal Monitor. Social and health spending more broadly should continue to be prioritized. Embedding these fiscal initiatives in a medium-term framework with a clear, credible path for stabilizing public debt can also help create room to deliver the needed support.
Even as policymakers focus on cushioning the impact of the war and the pandemic, attention will need to be maintained on longer-term goals. This includes reskilling workers for the ongoing digital transformation while facilitating the labor market transformation necessary to achieve net zero emissions, as discussed in Chapter 3 of this report. A comprehensive approach that combines carbon pricing, investment in renewables, and compensation for those adversely affected by the transition can help hasten the needed green transition. Another long-term goal will be to improve the resilience of global supply chains, as discussed in Chapter 4. The analysis in that chapter highlights how reshoring policies could leave economies more exposed to supply disruptions, not less.
Multilateral cooperation remains essential to advance these goals. An immediate priority is to find a peaceful resolution to the war. On the climate front, it is imperative to close the gap between stated ambitions and policy actions. An international carbon price floor differentiated by country income levels and multilateral finance initiatives will be required to coordinate national efforts aimed at reducing the risks of catastrophic climate events. Equally important is the need to secure equitable worldwide access to the full complement of COVID-19 tools—tests, therapies, and vaccines—to contain the virus, and to address other global health priorities.
Policymakers should also ensure that the global financial safety net operates effectively to help vulnerable economies adjust as interest rates rise in the fight against inflation. For some economies, this will mean securing adequate liquidity support to tide over short-term refinancing difficulties. But for other economies, comprehensive sovereign debt restructuring will be required to free up resources for vital health, social, and development spending. The G20’s Common Framework for Debt Treatments offers guidance for such restructuring but has yet to deliver. The absence of an effective and expeditious framework is a fault line in the global financial system. Particular attention should also be paid to the overall stability of the global economic order to make sure that the rules-based framework that has lifted hundreds of millions out of poverty is not dismantled.
Importantly, these risks and policies interact in complex ways, at short, medium, and longer horizons. Rising interest rates, the need to protect vulnerable populations against high food and energy prices, or increased defense spending, make it more difficult to maintain fiscal sustainability. In turn, the erosion of fiscal space makes it harder to invest in the climate transition, while delays in dealing with the climate crisis make economies more vulnerable to commodity price shocks, which feeds into inflation and economic instability. Geopolitical fragmentation worsens all these trade-offs by increasing the risk of conflict and economic volatility and decreasing overall efficiency.
In the matter of a few weeks, the world has yet again experienced a major, transformative shock. Just as a durable recovery from the pandemic-induced global economic collapse appeared in sight, the war has created the very real prospect that a large part of the recent gains will be erased. The long list of challenges calls for commensurate and concerted policy actions at the national and multilateral levels to prevent even worse outcomes and improve economic prospects for all.
Pierre-Olivier Gourinchas
Economic Counsellor and Director of Research
Executive Summary
The war in Ukraine has triggered a costly humanitarian crisis that demands a peaceful resolution. Economic damage from the conflict will contribute to a significant slowdown in global growth in 2022. A severe double-digit drop in GDP for Ukraine and a large contraction in Russia are more than likely, along with worldwide spillovers through commodity markets, trade, and financial channels. Even as the war reduces growth, it will add to inflation. Fuel and food prices have increased rapidly, with vulnerable populations—particularly in low-income countries— most affected. Elevated inflation will complicate the trade-offs central banks face between containing price pressures and safeguarding growth. Interest rates are expected to rise as central banks tighten policy, exerting pressure on emerging market and developing economies. Moreover, many countries have limited fiscal policy space to cushion the impact of the war on their economies. The invasion has contributed to economic fragmentation as a significant number of countries sever commercial ties with Russia and risks derailing the post-pandemic recovery. It also threatens the rules-based frameworks that have facilitated greater global economic integration and helped lift millions out of poverty. In addition, the conflict adds to the economic strains wrought by the pandemic. Although many parts of the world appear to be moving past the acute phase of the COVID-19 crisis, deaths remain high, especially among the unvaccinated. Moreover, recent lockdowns in key manufacturing and trade hubs in China will likely compound supply disruptions elsewhere.
Global growth is projected to slow from an estimated 6.1 percent in 2021 to 3.6 percent in 2022 and 2023. This is 0.8 and 0.2 percentage points lower for 2022 and 2023 than in the January World Economic Outlook Update. Beyond 2023, global growth is forecast to decline to about 3.3 percent over the medium term. Crucially, this forecast assumes that the conflict remains confined to Ukraine, further sanctions on Russia exempt the energy sector (although the impact of European countries’ decisions to wean themselves of Russian energy and embargoes announced through March 31, 2022, are factored into the baseline), and the pandemic’s health and economic impacts abate over the course of 2022. With a few exceptions, employment and output will typically remain below pre-pandemic trends through 2026. Scarring effects are expected to be much larger in emerging market and developing economies than in advanced economies—refflecting more limited policy support and generally slower vaccination—with output expected to remain below the pre-pandemic trend throughout the forecast horizon. Unusually high uncertainty surrounds this forecast, and downside risks to the global outlook dominate—including from a possible worsening of the war, escalation of sanctions on Russia, a sharper-than-anticipated deceleration in China as a strict zero-COVID strategy is tested by Omicron, and a renewed fare-up of the pandemic should a new, more virulent virus strain emerge. Moreover, the war in Ukraine has increased the probability of wider social tensions because of higher food and energy prices, which would further weigh on the outlook.
Inflation is expected to remain elevated for longer than in the previous forecast, driven by war-induced commodity price increases and broadening price pressures. For 2022, inflation is projected at 5.7 percent in advanced economies and 8.7 percent in emerging market and developing economies—1.8 and 2.8 percentage points higher than projected in January. Although a gradual resolution of supply-demand imbalances and a modest pickup in labor supply are expected in the baseline, easing price inflation eventually, uncertainty again surrounds the forecast. Conditions could significantly deteriorate. Worsening supply-demand imbalances— including those stemming from the war—and further increases in commodity prices could lead to persistently high inflation, rising inflation expectations, and stronger wage growth. If signs emerge that inflation will be high over the medium term, central banks will be forced to react faster than currently anticipated—raising interest rates and exposing debt vulnerabilities, particularly in emerging markets.
The war in Ukraine has exacerbated two difficult policy trade-offs: between tackling inflation and safeguarding the recovery; and between supporting the vulnerable and rebuilding fiscal buffers.
Tackling inflation: Although the drivers of inflation are in many cases beyond the control of central banks (the war, sanctions, the pandemic, supply chain disruptions), price pressures are increasingly broad-based. The transmission of the war shock will vary across countries, depending on trade and financial linkages, exposure to commodity price increases, and the strength of the preexisting inflation surge. The appropriate monetary policy response will therefore differ across economies. In some places, including the United States, inflationary pressure had strengthened considerably and become more broad-based even before the Russian invasion of Ukraine—buoyed by strong policy support. In other countries, the prominence of fuel- and war-affected commodities in local consumption baskets could lead to broader and more persistent price pressures. In both cases, tighter monetary policy will be appropriate to check the cycle of higher prices driving up wages and inflation expectations, and wages and inflation expectations driving up prices. In countries where the harmful effects from the war are larger, the trade-off between safeguarding growth and containing inflation will be more challenging. Central banks should remain vigilant to the impact of price pressures on inflation expectations and continue to communicate clearly on the outlook for inflation and monetary policy. A well-telegraphed, data-dependent approach to adjusting forward guidance on the monetary stance—including the unwinding of record-high central bank balance sheets and the path for policy rates—is the key to maintaining the credibility of policy frameworks.
Fiscal policy amid rising interest rates and a cost-of-living squeeze: Fiscal policies should depend on exposure to the war, the state of the pandemic, and the strength of the recovery. Following a huge and necessary fiscal expansion in many countries during the pandemic, debt levels are at all-time highs and governments are more exposed than ever to higher interest rates. The need for consolidation should not prevent governments from prioritizing spending with well-targeted support for the vulnerable—including refugees, those struggling because of commodity price spikes, and those affected by the pandemic. Where fiscal space permits and when monetary policy is constrained at the national level—for instance by the Effective Lower Bound or in a monetary union—broader fiscal support may be warranted, depending on the severity of the decline in aggregate demand. But this support should be deployed in ways that avoid exacerbating ongoing supply-demand imbalances and price pressures. Where fiscal space is more limited, governments will need to tread a difficult path between fiscal consolidation and prioritizing essential expenditures. Moreover, authorities should be vigilant regarding private sector vulnerabilities to rising interest rates, a topic explored in Chapter 2.
Preparing for tomorrow’s economy: Beyond the immediate challenges of the war and the pandemic, policymakers should not lose sight of longer-term goals. Pandemic disruptions have highlighted the productivity of novel ways of working. Governments should look to harness positive structural change wherever possible, embracing the digital transformation and retooling and reskilling workers to meet its challenges. Carbon pricing and fossil fuel subsidy reform can also help with the transition to a cleaner mode of production, less exposed to fossil fuel prices—more important than ever in light of the fallout of the war on the global energy market. The green energy transition will also entail labor market reallocation across occupations and sectors. Chapter 3 examines policies that can facilitate this labor market transformation.
Multilateral efforts to respond to the humanitarian crisis, prevent further economic fragmentation, maintain global liquidity, manage debt distress, tackle climate change, and end the pandemic remain essential. The adverse consequences from the current geopolitical conflict are a reminder of the importance of global cooperation. This extends from addressing the immediate needs of war refugees to the eventual great effort to rebuild Ukraine. As countries contend with higher volatility, spending pressures from humanitarian response needs, and tighter financial market conditions, the likelihood that some countries will become financially constrained increases. Multilateral institutions offer a critical safety net, providing emergency liquidity and preventing crises from spreading. Where liquidity support alone is insufficient, progress toward orderly debt restructuring is essential. On climate, advanced economies must make real progress toward their COP26 climate summit pledges. Emerging market and developing economies must extend their ambition to reduce emissions. And as the pandemic is not yet over, governments must use all tools at their disposal to combat the virus, both by meeting vaccination targets and by ensuring equitable access to tests and treatment.