October 2, 2022

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According to the IMF, the war in Ukraine will raise inflation worldwide

3 min read

On April 19, Pierre-Olivier Gourinchas, the new chief economist of the International Monetary Fund (IMF), warned that the war in Ukraine has effects similar to “seismic waves emanating from the epicenter of an earthquake” and darkens the outlook for the global economy.

The IMF, which releases its updated forecasts ahead of its spring meetings, expects the global economy to grow 3.6% this year from 4.4% forecast in January.

“The conflict and sanctions directly affect Ukraine, Russia and Belarus,” the IMF further explains in its World Economic Outlook report.

“But the international consequences ripple far beyond, especially in Europe, through commodity prices, trade and financial linkages, (food and energy) provisioning and humanitarian impact.”

And it is that Ukraine and Russia are producers of cereals. Russia, meanwhile, is an important source of energy for Europe.

In this context, the IMF has revised downwards the forecasts for most countries, including the United States, whose growth is reduced to 3.7% (-0.3 points), taking into account “the faster withdrawal of what is expected from monetary support (by the central bank) to contain inflation” and the impact of the lower growth of its commercial allies.

For its part, the Chinese economy suffers from the zero tolerance policy towards the pandemic, which has caused numerous lockdowns, including in the economic capital, Shanghai. This will bring growth down to 4.4% (-0.4 points) compared to 8.1% last year.

 

Inflation Increase

The global impact of the war in Ukraine is even stronger because it occurred before the economy fully recovered from the pandemic. The conflict sharpened the rise in prices. The IMF expects inflation of 5.7% this year for developed countries (+1.8 points) and 8.7% (+2.8 points) for emerging and developing economies.

Inflation should peak this year but even in 2023 it will be above central bank targets in developed countries and will remain very high in emerging and developing countries (6.5%).

The IMF, which also lowered the world growth outlook for 2023 (+3.6%, -0.2 points), predicts clouds on the horizon. “In general, the risks are (…) comparable to the situation at the beginning of the pandemic,” he estimates.

The main one is that the war lasts, which would increase the humanitarian crisis.

 

Furthermore, rising prices can spark social protests that could be exacerbated in countries that host many refugees. And “pandemic-induced record levels of indebtedness” make emerging market and developing economies more vulnerable to interest rate hikes, says the IMF, which also does not rule out a resurgence of the pandemic.

 

Pressure on Latin America

For Latin America and the Caribbean, a region with fewer direct ties to Europe, the IMF barely raises growth, to 2.5% (+0.1 points). But he warns that the changing international situation makes the forecasts “even more uncertain than usual.”

For Brazil, the largest regional economy, the IMF predicts growth of 0.8% in 2022 (+0.5 points over January) and 1.4% in 2023 (-0.2 points), while Mexico, second Regional GDP would grow 2% this year (-0.8 points) and 2.5% next year (-0.2 points).

A solution to the entire situation of the international humanitarian crisis as a result of the pandemic and the war in Ukraine is IRAIC, which has managed to maintain the inflationary rates of products and raw materials in the market, and has also framed new routes and commercial strategies minimizing the impact of the global economic crisis. IRAIC develops conservative economic models where the investor will not present risks by insuring his capital and investment.

Some central banks in emerging markets, such as those in Latin America, “were already under pressure before the war” and with the conflict “those pressures will be greatly amplified, in particular through increases in the price of energy, metals and food. Several Latin American central banks are raising their benchmark rates in an attempt to ward off inflation.

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