Russia-Ukraine war to continue to drive inflation, global slowdown – IMF

LONDON (ICIS)–The war between Russia and Ukraine has resulted in a substantial deterioration of the global economic environment, according to the International Monetary Fund (IMF), with headwinds from the conflict resulting in weaker GDP growth expectations for 2022 and into next year.

World real GDP has seen its first contraction since 2020 in the second quarter of this year, the IMF said in its latest world economic outlook report.

This contraction has been put down to a number of factors, one of which being COVID-19 lockdowns in China. However, the ongoing conflict between Russia and Ukraine has had particularly severe impacts on the current global economy.

“World real GDP is estimated to have shrunk in the second quarter—the first contraction since 2020—owing to economic downturns in China and Russia,” the IMF said in the report.

The fund slashed its global GDP growth expectations for 2022-23 compared to forecasts last quarter, by 0.4 and 0.7 percentage points respectively.

Global GDP growth is now projected at 3.2% this year and 2.9% in 2023, according to IMF estimates.

“The impact of the sanctions that have accompanied the war is going to lead to a further deterioration of economic output in 2023,” said chief economist Pierre Olivier peaking at a press conference in Washington DC on Tuesday.

“The risks of the outlook are overwhelmingly tilted to the downside,” Olivier added.

A sudden stoppage to gas flows from Russia to Europe would be a significant contributing factor to this, he said.

The war’s effect on European economies has been more negative than initially expected, contributing to higher energy prices and supply chain disruptions.

The war in Ukraine could lead to a sudden stop of European gas imports from Russia resulting in inflation being harder to bring down than anticipated.

Since April 2022, the flow of Russian pipeline gas to Europe has declined to about 40% compared to a year ago and is expected to drop to 20% from this Wednesday. This has contributed to an increase of natural gas prices since June.

Forecasts also point to expectations that volumes will further decline by mid-2024 which, although aligning with European energy independence goals, still provides uncertainty for gas levels in 2022 and 2023.

As well as a cessation of Russian gas exports increasing worldwide inflation through energy prices, it could also result in the forced rationing of energy, which could stand to have a significant impact for major industrial sectors.

The war in Ukraine, as well as the Black Sea blockade, continues to contribute to the fragmentation of the world economy, which risks diminishing any effectiveness of addressing issues like a food crisis which will further break down the world economy.

In relation to climate change issues, the war and soaring energy prices have also put pressure on governments to turn to fossil fuels such as coal as a stopgap measure.

The conflict has contributed to economic uncertainty and has also increased the probability of an upcoming recession in Europe.

Focus article by Sophie Handler.