Projections: world economic growth will be subdued, inflation will remain elevated but will moderate next year
According to the latest International Monetary Fund (IMF) World Economic Outlook, the world and Lithuania’s economies will continue to grow, but at a slower pace than projected before Russia’s invasion of Ukraine, and inflation will remain elevated this year but will moderate the following year. Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, along with the heads of other central banks and finance ministers of other countries will discuss the consequences of the war on the world economy and measures to contain them during the Spring Meetings of the IMF in Washington.
“The impact of the war against Ukraine will be felt globally due to higher food and energy prices. The international community will have to focus on mitigating the economic consequences of the war, which should be the top priority of the IMF,” says Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania.
The IMF predicts a 3.6% GDP growth for the current and the following year, thus the world economy will grow by 0.8 percentage point in 2022 and 0.2 percentage point in 2023, at a slower pace than the IMF forecasted in January. Russia’s ongoing aggression and soaring commodity prices, the increasing debt load in developing countries and the ongoing disruptions in some of global supply chains caused by the COVID-19 pandemic will pose major challenges.
The IMF significantly revised down Lithuania’s growth projections for this year. Economic growth is expected to reach 1.8% and will be 2.3 percentage points slower compared to the autumn forecast. As a result of the continued rise in energy prices, inflation is expected to reach 13.3% this year but will moderate to 4.3% next year.
According to Gediminas Šimkus, the revision of growth projections partly reflects the war-induced shock. However, he also pointed out that the situation in Lithuania was somewhat better compared to other countries in the region due to determined reduction of economic and energy ties with Russia. Although the war against Ukraine caused a big shock to Lithuania’s and world economies, it is mostly related to commodity market and the negative impact via other channels is limited. Accordingly, growth is projected to continue, and no recession is expected.
A significant economic slowdown of Lithuania’s main trading partners is expected as well. Compared to January, the euro area growth projections were cut by 1.1 percentage points for this year and by 0.2 percentage point for the next, to 2.8% and 2.3%, respectively. The revision is mainly due to a sharp slowdown in the main euro area economies, Germany and Italy, where a significant part of the value added is generated in manufacturing sectors dependent on energy imports from Russia.
Other factors also have a negative impact on the developments in the world economy. The rise in interest rates makes it difficult for the private sector and developing countries to access financial markets. The tightening of financing conditions and the increase in sovereign debt during the pandemic limit the ability to respond to economic challenges posed by the war by means of fiscal measures. Moreover, the slowdown in China’s growth (an unusually weak growth of 4.4% is forecasted for 2022) has an adverse impact on the development of many countries.
The IMF also points out that the war can fuel economic and financial deglobalisation trends and threatens the rules-based international order. The Fund stresses that multilateral efforts are essential to resolve the humanitarian crisis as well as structural challenges that have been on the international agenda for a while, such as liquidity and debt problems of low-income countries, progress and scaling up ambitions in combating climate change and the continued fight against the ongoing pandemic.
The Chairman of the Bank of Lithuania is a member of the IMF Board of Governors and participates in IMF meetings every six months, where heads of central banks and finance ministers from all over the world discuss the current issues of the world economy and seek solutions. During this visit to Washington, in addition to the regular meetings of the Nordic-Baltic countries and the International Monetary and Financial Committee, meetings with high-level IMF officials are planned, where the questions about the suspension of membership to the IMF of Russia and Belarus will also be raised.