Growth slows as economies grapple with supply disruptions, higher inflation, record debt and persistent uncertainty.
The continuing global recovery faces multiple challenges as the pandemic enters its third year. The rapid spread of the Omicron variant has led to renewed mobility restrictions in many countries and increased labor shortages. Supply disruptions still weigh on activity and are contributing to higher inflation, adding to pressures from strong demand and elevated food and energy prices. Moreover, record debt and rising inflation constrain the ability of many countries to address renewed disruptions.
Some challenges, however, could be shorter lived than others. The new variant appears to be associated with less severe illness than the Delta variant, and the record surge in infections is expected to decline relatively quickly. The IMF’s latest World Economic Outlook therefore anticipates that while Omicron will weigh on activity in the first quarter of 2022, this effect will fade starting in the second quarter.
Other challenges, and policy pivots, are expected to have a greater impact on the outlook. We project global growth this year at 4.4 percent, 0.5 percentage point lower than previously forecast, mainly because of downgrades for the United States and China. In the case of the United States, this reflects lower prospects of legislating the Build Back Better fiscal package, an earlier withdrawal of extraordinary monetary accommodation, and continued supply disruptions. China’s downgrade reflects continued retrenchment of the real estate sector and a weaker-than-expected recovery in private consumption. Supply disruptions have led to markdowns for other countries too, such as Germany. We expect global growth to slow to 3.8 percent in 2023. This is 0.2 percentage point higher than in the October 2021 WEO and largely reflects a pickup after current drags on growth dissipate.
We have revised up our 2022 inflation forecasts for both advanced and emerging market and developing economies, with elevated price pressures expected to persist for longer. Supply-demand imbalances are assumed to decline over 2022 based on industry expectations of improved supply, as demand gradually rebalances from goods to services, and extraordinary policy support is withdrawn. Moreover, energy and food prices are expected to grow at more moderate rates in 2022 according to futures markets. Assuming inflation expectations remain anchored, inflation is therefore expected to subside in 2023.