FOREWORD

G
lobal economic prospects have worsened modity markets, trade, and financial linkages. Because
significantly since our last World Economic Russia is a major supplier of oil, gas, and metals, and,
Outlook forecast in January. At the time, together with Ukraine, of wheat and corn, the current
we had projected the global recovery to and anticipated decline in the supply of these com-
strengthen from the second quarter of this year after modities has already driven their prices up sharply.
a short-lived impact of the Omicron variant. Since Europe, Caucasus and Central Asia, Middle East
then, the outlook has deteriorated, largely because and North Africa, and sub-Saharan Africa are most
of Russia’s invasion of Ukraine—causing a tragic affected. The food and fuel price increases will hurt
humanitarian crisis in Eastern Europe—and the sanc- lower-income households globally—including in the
tions aimed at pressuring Russia to end hostilities. Americas and Asia.
This crisis unfolds while the global economy was on As Chapter 1 details, the war adds to the series of
a mending path but had not yet fully recovered from supply shocks that have struck the global economy
the COVID-19 pandemic, with a significant diver- over the course of the pandemic, contributing to more
gence between the economic recoveries of advanced shortages beyond the energy and agricultural sectors.
economies and emerging market and developing ones. Through closely integrated global supply chains, pro-
In addition to the war, frequent and wider-ranging duction disruptions in one country can very quickly
lockdowns in China—including in key manufactur- cascade globally. Firms in Russia and Ukraine supply
ing hubs—have also slowed activity there and could specialized inputs, and shortfalls in some of those
cause new bottlenecks in global supply chains. Higher, inputs are already having impacts on European car
broader, and more persistent price pressures also led manufacturers. Some countries in eastern Europe and
to a tightening of monetary policy in many coun- central Asia have large direct trade and remittance links
tries. Overall risks to economic prospects have risen with Russia. Activity in those economies is expected
sharply and policy trade-offs have become ever more to suffer. The displacement of more than 4 million
challenging. Ukrainian people to neighboring countries, especially
Beyond the immediate humanitarian impacts, the Poland but also Romania, Moldova, and Hungary, will
war will severely set back the global recovery, slow- also add to economic pressures in the region.
ing growth and increasing inflation even further. This Even prior to the war, inflation had surged in many
report projects global growth at 3.6 percent in 2022 economies because of soaring commodity prices and
and 2023—0.8 and 0.2 percentage points lower than pandemic-induced supply-demand imbalances. Some
in the January forecast, respectively. The downgrade emerging markets and developed economies’ central
largely reflects the war’s direct impacts on Russia and banks, such as the US Federal Reserve and those in
Ukraine and global spillovers. Latin America, had already come under pressure before
Both Russia and Ukraine are projected to experi- the war, bringing forward the timing of their mon-
ence large GDP contractions in 2022. The severe etary policy tightening. War-related supply shortages
collapse in Ukraine is a direct result of the invasion, will greatly amplify those pressures, notably through
destruction of infrastructure, and exodus of its people. increases in the price of energy, metals, and food.
In Russia, the sharp decline reflects the impact of Although bottlenecks are expected to eventually ease
the sanctions with a severing of trade ties, greatly as production elsewhere responds to higher prices and
impaired domestic financial intermediation, and loss new capacity becomes operational, supply shortages in
of confidence. some sectors are expected to last into 2023. As a result,
The economic effects of the war are spreading far inflation is now projected to remain elevated for much
and wide—like seismic waves that emanate from the longer than in our previous forecast, in both advanced
epicenter of an earthquake—mainly through com- and emerging market and developing economies.

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WORLD ECONOMIC OUTLOOK: WAR SETS BACK THE GLOBAL RECOVERY

In many countries, inflation has become a central Because of the unprecedented nature of the shock,
concern. In some advanced economies, including the we highlight that the uncertainty around these projec-
United States and some European countries, it has tions is considerable, well-beyond the usual range.
reached its highest level in more than 40 years, in Growth could slow significantly more while inflation
the context of tight labor markets. There is a rising could turn out higher than expected if, for instance,
risk that inflation expectations become de-anchored, sanctions aimed at ending the war extend to an even
prompting a more aggressive tightening response from broader volume of Russian energy and other exports.
central banks. In emerging market and developing These possibilities are explored in more detail in a
economies, increases in food and fuel prices could Scenario Box in Chapter 1. Moreover, the pandemic is
significantly increase the risk of social unrest. still with us. The continued spread of the virus could
Immediately after the invasion, capital outflows give rise to more lethal variants that escape vaccines
increased markedly from emerging market and or immunity from past infections, prompting new
developing economies, tightening financial condi- lockdowns and production disruptions.
tions for vulnerable borrowers and net importers of In this difficult and uncertain environment, effec-
commodities, and putting downward pressure on the tive national-level policies and multilateral efforts
currencies of the most exposed countries. So far, this have an ever more important role in shaping eco-
repricing has been mostly orderly. Yet the April 2022 nomic outcomes. Central banks will need to adjust
Global Financial Stability Report highlights several their monetary stances even more aggressively should
financial fragility risks. A wider range of emerging medium- or long-term inflation expectations start
market economies could come under pressure if the drifting from central bank targets or core inflation
pace of global monetary tightening accelerates further, remains persistently elevated. As advanced economy
especially in the United States, or if financial markets central banks tighten policy and interest rates rise
start to reprice more aggressively, which would further in those countries, emerging market and developing
weigh on the global outlook. economies could face a further withdrawal of capital
On the fiscal side, policy space was already eroded and currency depreciations that increase inflation
in many countries by necessary COVID-related pressures. Clear central bank communications on
spending. Debt levels have risen significantly, and the drivers of inflation and forward guidance on the
extraordinary fiscal support was expected to be outlook for monetary policy, supplemented—when
removed in 2022–23. The war and the impending appropriate—with capital flow management measures
increase in global interest rates will further reduce in line with the IMF’s revised Institutional View on
fiscal space in many countries, especially oil- and capital flows, will be essential to minimize the risk of
food-importing emerging market and developing disruptive adjustments.
economies. The analysis in Chapter 2 shows that Although several economies will need to consoli-
non-financial corporate and household leverage date their fiscal balances, this should not impede
increased in many countries during the pandemic, as governments from providing well-targeted support for
many governments helped maintain access to credit. refugees displaced by conflict, households squeezed by
Looking ahead, this may create some credit market higher food and fuel prices, and those affected by the
vulnerabilities as interest rates and risk premia rise, pandemic, as argued in the April 2022 Fiscal Monitor.
with implications for financial stability. Social and health spending more broadly should
The war has also increased the risk of a more continue to be prioritized. Embedding these fiscal
permanent fragmentation of the world economy into initiatives in a medium-term framework with a clear,
geopolitical blocks with distinct technology standards, credible path for stabilizing public debt can also help
cross-border payment systems, and reserve currencies. create room to deliver the needed support.
Such a tectonic shift would entail high adjustment Even as policymakers focus on cushioning the impact
costs and long-run efficiency losses as supply chains of the war and the pandemic, attention will need to be
and production networks are reconfigured. It also maintained on longer-term goals. This includes reskill-
represents a major challenge to the rules-based frame- ing workers for the ongoing digital transformation while
work that has governed international and economic facilitating the labor market transformation necessary to
relations for the last 70 years. achieve net zero emissions, as discussed in Chapter 3 of

xiv International Monetary Fund | April 2022

 FOREWORD

this report. A comprehensive approach that combines such restructuring but has yet to deliver. The absence
carbon pricing, investment in renewables, and com- of an effective and expeditious framework is a fault
pensation for those adversely affected by the transition line in the global financial system. Particular atten-
can help hasten the needed green transition. Another tion should also be paid to the overall stability of the
long-term goal will be to improve the resilience of global global economic order to make sure that the rules-
supply chains, as discussed in Chapter 4. The analysis based framework that has lifted hundreds of millions
in that chapter highlights how reshoring policies could out of poverty is not dismantled.
leave economies more exposed to supply disruptions, Importantly, these risks and policies interact in
not less. complex ways, at short, medium, and longer horizons.
Multilateral cooperation remains essential to Rising interest rates, the need to protect vulnerable
advance these goals. An immediate priority is to populations against high food and energy prices, or
find a peaceful resolution to the war. On the climate increased defense spending, make it more difficult to
front, it is imperative to close the gap between stated maintain fiscal sustainability. In turn, the erosion of
ambitions and policy actions. An international carbon fiscal space makes it harder to invest in the climate
price floor differentiated by country income levels and transition, while delays in dealing with the climate
multilateral finance initiatives will be required to coor- crisis make economies more vulnerable to commodity
dinate national efforts aimed at reducing the risks of price shocks, which feeds into inflation and economic
catastrophic climate events. Equally important is the instability. Geopolitical fragmentation worsens all
need to secure equitable worldwide access to the full these trade-offs by increasing the risk of conflict and
complement of COVID-19 tools—tests, therapies, economic volatility and decreasing overall efficiency.
and vaccines—to contain the virus, and to address In the matter of a few weeks, the world has yet again
other global health priorities. experienced a major, transformative shock. Just as a
Policymakers should also ensure that the global durable recovery from the pandemic-induced global
financial safety net operates effectively to help vulner- economic collapse appeared in sight, the war has cre-
able economies adjust as interest rates rise in the fight ated the very real prospect that a large part of the recent
against inflation. For some economies, this will mean gains will be erased. The long list of challenges calls
securing adequate liquidity support to tide over short- for commensurate and concerted policy actions at the
term refinancing difficulties. But for other economies, national and multilateral levels to prevent even worse
comprehensive sovereign debt restructuring will be outcomes and improve economic prospects for all.
required to free up resources for vital health, social,
and development spending. The G20’s Common Pierre-Olivier Gourinchas
Framework for Debt Treatments offers guidance for Economic Counsellor and Director of Research

International Monetary Fund | April 2022 xv