by Kari Grenade, PhD Regional Economist and Macroeconomic Advisor
The International Monetary Fund (IMF) published its flagship report called the World Economic Outlook (WEO) on 19 April 2022.
In the WEO, which is published twice a year (April and October, with updates in January and July), the IMF provides a comprehensive assessment of global economic performance and prospects covering selected macroeconomic data for major country groupings as well as for individual countries.
The salient message in the April 2022 WEO is that global economic growth has slowed markedly and economic risks have risen. The global growth projection of 3.6% for 2022 is a significant deceleration relative to the estimate of 6.1% in 2021. The April 2022 projection is 0.8 percentage points lower than the one that was made in January 2022 for the full year 2022. It is indeed sobering that the projection for global economic growth was revised downwards so significantly just 3 months into the calendar year.
The WEO also forecasted higher global inflation, mainly as a consequence of Russia’s invasion of Ukraine and attendant impacts, including increased commodity prices and worsening supply chain disruptions. The IMF’s 2022 average inflation forecasts of 5.7% in advanced economies (40 countries including USA, Euro Area, Japan, UK and Canada) and 8.7% in emerging market and developing economies (156 countries including China, India, and Brazil) are 1.8 and 2.8 percentage points higher than the averages projected in January 2022. The IMF is of the view that inflation could remain elevated for longer than previously thought given heightened uncertainties regarding the war and its negative economic and other impacts.
The IMF projects global growth to remain at 3.6% in 2023, but decelerate to about 3.3% over the medium term, with employment and economic output being lower than pre-pandemic levels through to 2026 for the majority of countries. The IMF cautions that due to acute uncertainties, the economic outlook is subject to significant downside risks, “including from a possible worsening of the war, escalation of sanctions on Russia, a sharper-than-anticipated deceleration in China as a strict zero-COVID strategy is tested by Omicron, and a renewed flare-up of the pandemic should a new, more virulent virus strain emerge” (page xvi). The April 2022 WEO can be accessed at https://www.imf.org/en/Publications/WEO/Issues/2022/04/19/world-economic-outlook-april-2022.
Specifically relating to the 14 independent countries of Caricom, the IMF projects average economic growth of 8.7% in 2022 and 6.3% in 2023, largely reflecting estimated growth for Guyana of 47.2% and 34.5% in 2022 and 2023 respectively, associated with robust economic activity stemming from oil production. If Guyana is removed from the sample, the average growth of the 14 countries is estimated at 5.3% in 2022 and 4.1% in 2023. Average inflation for the 14 Caricom countries is forecasted at 9.3% in 2022 and 6.3% in 2023; the elevated averages reflect double-digit inflation estimates for Haiti and Suriname owing to currency devaluations in both countries. Removing them from the sample, the estimated average inflation rate for the Region moderates to 5.3% in 2022 and 4.2% in 2023.
Indeed, economic recovery for the Region is trepid at best and subject to setbacks given the many downside risks. In that context, jobs and income levels could become highly tenuous with potentially adverse social consequences. Jobs and incomes in sectors such as tourism and travel, manufacturing, wholesale and retail trade, and real estate, which are particularly vulnerable to the vagaries of economic cycles, stand to be most affected.
Inflation – higher for longer- will inflict socio-economic pain necessitating potent policy prescriptions to lessen the pain. As I have explained in previous articles, there is little (if anything) governments can do to directly reduce the price of imported goods, which is the source of the current spate of inflation. However, they can take targeted measures to cushion the impact of high imported prices, especially on the most vulnerable in society. Revenue windfalls arising from taxes and duties on higher import values can be used to help in this regard. Businesses will also have to manage inflation implications on profitability.
Caribbean economies will also be affected by rising global interest rates, which are expected to increase further to tamp down inflation. Already, the US Central Bank (the Federal Reserve or FED for short) has begun to hike US interest rates. On 5 May 2022, the FED increased its benchmark rate by half of a percentage point, lifting it to a target range of 0.75% to 1%. The FED rate has been in the vicinity of 0% in recent times and the 50 basis points increase on 5 May was the first rate hike of that magnitude since 2000. The clear indication from the FED is that it is likely to continue to increase its benchmark rate throughout this year. Of necessity, therefore, vulnerabilities to rising US interest rates must be managed. This applies to governments and businesses with a large portion of their debt portfolios in variable interest rates. Credit conditions, and by extension economic activity, can also be adversely affected to the extent that Caribbean central banks also raise interest rates, which would translate to higher lending rates by financial institutions within countries.
Over the near term, policymakers would have to be intentional about managing these economic tensions, through appropriately calibrated policies. In the final analysis, country idiosyncrasies will determine individual policy responses in balancing the trade-off between supporting economic recovery and containing inflation. This balancing act is perhaps the most important short-term policy priority facing Caribbean policymakers.
Beyond the immediate challenges, policymakers cannot afford to lose sight of longer-term sustainable development priorities, including inter alia: strengthening resilience on several fronts; building a digital economy and society; rebuilding communities and empowering people, and mending the broken relationship with nature through ambitious climate mitigation and adaptation measures.