IMF terms world’s economic outlook ‘gloomy, more uncertain’

ISLAMABAD: While the IMF Tuesday scaled down the global GDP forecast to 3.2 percent in 2022 and 2.9 percent in 2023 dubbing the world’s economic outlook “gloomy and more uncertain,” the situation in Pakistan is also not different. The State Bank of Pakistan (SBP) on July 7, 2022, while announcing the monetary policy, stated that Pakistan’s GDP growth projection had also been slashed down to 3-4 percent against 5 percent which the sitting government had projected in the budgetary document for the financial Year 2022-23.

The international financial institutions (IFIs) such as the World Bank (WB) on June 08, 2022 said in its Global Economic Prospects that Pakistan’s GDP growth will lower to 4 percent in the financial year 2022-23.

In the report, the WB slashed the global growth to 2.9 for FY23 due to the Russian invasion of Ukraine, which caused a severe downturn. The Pakistan economy remains engulfed in various challenges, including a mounting current deficit amid a spike in the import bill and a rise in debt payment, which aggravated the foreign exchange reserves position of the country. Pakistan’s inflationary pressures have revised upward substantially for the current fiscal year 2023 owing to elevated global energy and food prices as well as the withdrawal of subsidies for raising tariffs for the power and oil sectors.

According to the Asian Development Outlook (ADO) 2022 Supplement released on Thursday, the GDP growth in Pakistan is expected to be moderate in FY2022 (ended June 30, 2022) on fiscal tightening measures to manage growing demand pressures and contain external and fiscal imbalances. Growth is projected to recover slightly in FY2023, supported by structural reforms.

Pakistan’s inflation, the ADO 2022 states, is marginally revised up for FY2022 and substantially so for FY2023. The Asian Development Bank (ADB) reduced its growth forecast for South Asia to 6.5 percent from 7.0 percent this year and to 7.1 percent from 7.4 percent in 2023. The ADB slashed its growth forecasts for developing Asia for this year and next, reflecting the economic fallout from Russia’s war in Ukraine and aggressive tightening by global central banks to tame inflation.

Also contributing to its weaker growth forecasts was a sharper-than-expected deceleration in China prompted by its lingering Covid-19 lockdowns, the ADB said. Downgrading its 2022 forecast for a third time, the ADB said it now expects the bloc’s combined economy, which includes China and India, to expand 4.6 percent, slower than its 5.2 percent projection in April.

However, financial experts believe that the latest GDP growth estimated by the SBP seems more real. They said that increasing the exchange rate against the dollar has also caused more increases in the POL price and will result in more hike in electricity prices.

The government has increased the electricity tariff by Rs7.91 per unit in phases and its impact will help fuel inflation and cost of doing business in the country will also increase manifold. This will retard the industrial activities in the country. As far as agriculture sector growth is concerned, the cotton crop production will touch its lowest ebb as in Sindh it is not sown in a big way because of shortage of water. However, in south Punjab cotton is sown monsoon and rains and flood in rural areas have also hit the crop.

The government will have to import 3 million tons of wheat as the wheat target has not been achieved. The latest indicators of the consumption of petrol and diesel shows a decline in sales of POL products which also shows the economy of the country has slowed down. Top industrial sources said that the sale of diesel in the country has plunged by 40-45 percent and petrol by 30-35 percent.

Textile sector sources say that the industry may not achieve the target for 2022-23, as demand in the US, EU and China has decreased because of the massive increase in inflation triggered due to the Russia-Ukraine war.

However, the International Monetary Fund on Tuesday cut its global growth projections for 2022 and 2023, dubbing the world’s economic outlook “gloomy and more uncertain.” The IMF now expects the world economy to grow 3.2% this year, before slowing further to a 2.9% GDP rate in 2023. The revisions mark a downgrade of 0.4 and 0.7 percentage points, respectively, from its April projections.

The Washington-based institute said the revised outlook indicated that the downside risks outlined in its earlier report were now materialising. Among those challenges are soaring global inflation, a worse-than-expected slowdown in China and the ongoing fallout from the war in Ukraine. “A tentative recovery in 2021 has been followed by increasingly gloomy developments in 2022,” the report said.

“Several shocks have hit a world economy already weakened by the pandemic: higher-than-expected inflation worldwide — especially in the United States and major European economies — 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,” it added.

The anticipated slowdown would mark the first quarterly contraction in global real GDP since 2020. A “plausible” but less likely alternative scenario could see global growth fall to around 2.6% in 2022 and 2.0% in 2023, the IMF said, putting global growth in the bottom 10% of outcomes since 1970. The WB last month slashed its 2022 global growth outlook to 2.9 percent from an earlier estimate of 4.1%, citing similar macroeconomic pressures.

Worsening growth prospects in the US, China and India drove the IMF’s downward revisions. The US’ GDP outlook was lowered 1.4 percentage points to 2.3%, driven by weaker-than-expected growth in the first half of 2022, reduced household purchasing power and tightening monetary policy.

China’s economy was seen growing 1.1 percentage points short of previous estimates, following extended Covid lockdowns and a deepening real estate crisis. The world’s second-largest economy is now expected to grow 3.3% in 2022 — its lowest clip in four decades, barring the initial fallout from the Covid-19 crisis in 2020.

India’s forecast was cut 0.8 percentage points to 7.4%, largely due to less favourable external conditions and more rapid policy tightening.

Meanwhile, the euro zone’s outlook was lowered 0.2 percentage points to 2.6%, though the IMF said greater fallout from the war in Ukraine was likely to hit further in 2023, particularly in the major economies of Germany, France and Spain.

Russia’s economy contracted less than expected in the second quarter despite wide-reaching economic sanctions over its unprovoked invasion of Ukraine, the IMF said. Its 2022 projection was revised up 2.5 percentage points, though its estimated growth rate remains negative at -6.0%.

Global inflation continues to rise. It comes as inflation continues to track higher through 2022, led by rising food and energy prices. Global inflation is now forecast to hit 6.6% in advanced economies and 9.5% in emerging market and developing economies this year — an upward revision of 0.9 and 0.8 percentage points, respectively. “It will take longer for inflation to go away and the overall magnitude of inflation is expected to come later this year,” Tobias Adrian, financial counsellor and director of the Monetary and Capital Markets Department at the International Monetary Fund, told CNBC’s Joumanna Bercetche Tuesday afternoon.

“We would expect a recession that is fairly shallow. A recession with growth rates around zero for the next year. That’s in the adverse scenario, it’s not a very sharp recession,” like the one we saw in the wake of Covid-19 and 2008 global recession, he added. With rising prices fuelling a global cost-of-living crisis, the IMF said taming inflation should be policymakers’ number one priority. “Tighter monetary policy will inevitably have real economic costs, but delay will only exacerbate them,” the report said.