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IMF slashes global growth forecast again citing 'gloomy' outlook

The International Monetary Fund on Tuesday again downgraded its forecast for global growth this year, blaming worse-than-expected inflation for an overall "gloomy and more uncertain" outlook.

The IMF now expects the global economy to grow by only 3.2% this year, a downgrade from the 3.6% it had previously projected in April. In April, the IMF cut its growth expectations for 2022 to 3.6% from 4.4%.

Among major economies, the United States saw the sharpest downward revision in the IMF's latest report.

The Fund lowered U.S. growth estimates to 2.3% from 3.7% in its April forecast, citing high inflation and faster-than-expected interest rate increases. In 2023, the U.S. economy is projected to grow by only 1.0%.

"We are seeing a very narrow path going forward. Not necessarily a recession under the baseline, but certainly a very vulnerable situation," IMF Chief Economist Pierre-Olivier Gourinchas told Yahoo Finance Tuesday.

The report noted inflation is also a global phenomenon, due in part to supply chain snags related to Russia’s invasion of Ukraine. Absent a resolution in Eastern Europe, the IMF warned the global picture for economic growth could end up deteriorating further.

“If we were in a scenario where those Russian gas flows to Europe are fully shutdown, then there will be another layer in terms of the downward revision,” Gourinchas said.

The bleak outlook extended to the IMF's forecast for China, where the group's economists now expect only 3.3% growth this year, down from 4.4% in its April forecast. The report noted that further flare-ups in COVID-19 infections could spur more shutdowns as a result of the county's zero-COVID policy.

International Monetary Fund (IMF) Managing Director Kristalina Georgieva attends the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain, November 3, 2021. REUTERS/Yves Herman
International Monetary Fund (IMF) Managing Director Kristalina Georgieva attends the UN Climate Change Conference (COP26) in Glasgow, Scotland, Britain, November 3, 2021. REUTERS/Yves Herman (Yves Herman / reuters)

Inflation the 'first priority'

The IMF noted that the "first priority" for policymakers should be handling untamed inflation.

The report now expects global inflation to rise 6.6% over the course of 2022 in advanced economies and 9.5% in emerging market and developing economies.

Both figures are higher than estimated three months ago.

Rapid price increases have already spurred interest rate increases from the U.S. Federal Reserve, the Bank of England, and — as of last week — the European Central Bank.

Those central banks hope higher borrowing costs will take some steam out of the post-pandemic boom in activity and spending, which could slow the pace of price increases. The maneuvering comes at the risk of over-tightening, or raising interest rates too high and too fast, which can trigger its own recession.

But with no sign yet of inflation easing in the United States, the expectation is that the Fed will again move this week to ratchet up borrowing costs — by another 0.75%.

"Central banks have to tighten. They don't really have a choice at this point, regardless of where inflation is coming from," Gourinchas said, adding that the monetary stimulus used to support economies through the pandemic need to be removed.

The IMF’s downgrade on U.S. growth is largely due to the Fed’s efforts to dampen economic activity, but cautioned that the fight against inflation is far from over.

The report also recommended that governments could pursue targeted relief packages, but only if they are “offset” by disinflationary policies like tax increases or reduced government spending.

The next round of economic forecasts are due from the IMF in October.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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