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The Growth Engines Are Sputtering

The International Monetary Fund’s significant downward revision to its 2022 World Economic Outlook, just one quarter into the calendar year, has generated headlines and hand-wringing around the world. But no less important is the dour forecast for 2023, which implies a broader crisis of prevailing growth models.

CAMBRIDGE – The International Monetary Fund’s revised World Economic Outlook (WEO) is sobering. It is rare for the organization to revise down sharply its projections for economic growth just one quarter into the calendar year. Yet in this case, it has done so for 86% of its 190 member countries, resulting in a decline of almost one percentage point in global growth for 2022 – from 4.4% to 3.6%. Moreover, this forecast is accompanied by a significant increase in projected inflation, and all this bad news is packaged in a wrapping of deeper uncertainty. There is a downward bias in the balance of risks, and inequality is expected to worsen both within and across countries.

The WEO revision is attracting a great deal of media attention. The focus, understandably, is on the relatively large size of the revisions for the current year, most of which are associated with the detrimental economic effects of Russia’s invasion of Ukraine. The war has disrupted the supply of corn, gas, metals, oil, and wheat, as well as pushing up the price of critical inputs such as fertilizer (which is made from natural gas). These developments have prompted warnings of a looming global food crisis and a severe increase in world hunger. Given the scale of the disruptions, it would not surprise me if the IMF issued a further downward revision to its growth projections – particularly for Europe – later this year.

But as important as these 2022 effects are, especially when it comes to the impact on vulnerable segments of the population and fragile countries, we also must pay attention to the IMF’s 2023 outlook. The projection for next year points to a medium-term problem that is no less important: the lost potency of growth models worldwide. The IMF does not expect its significant downward revision in global economic growth for 2022 to be offset in 2023. Instead, it has lowered its forecast for next year from 3.8% to 3.6%, with those revisions applying to both advanced and developing economies.

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