The International Monetary Fund (IMF) had expected that it would not be a relaxed trot out of the Corona recession. However, not with such an arduous “obstacle course” as the experts are now looming: due to the rapid spread of the omicron variant, ongoing contact restrictions, rising government debt and unexpectedly high inflation rates in many countries, the previous one was just three months old global growth forecast of 4.9 percent can no longer be met, according to the latest economic report published by the IMF in Washington on Tuesday. Instead, an increase of only 4.4 percent is now expected. According to the analysis, three of the largest economies in the world are mainly responsible for the damper: the USA, China – and Germany.
What may look like a barely noticeable correction in the decimal range to laypeople has serious consequences in practice: a loss of growth of half a percentage point would mean that the international community would lose an incredible 440 billion euros in economic output in 2022. The most dramatic is the revision for the USA, where the IMF economists estimate the economic growth at only four instead of the previous 5.2 percent. The downward correction for China and Germany is also significant at 0.8 points each. The People’s Republic can therefore only expect growth of 4.8 percent and the Federal Republic of just 3.8 percent. After all, in 2023 the increase in Germany could be 0.9 points higher than previously thought at 2.5 percent. The further economic recovery would therefore not fail, but only be postponed further. This coincides with what economists in this country are also predicting.
While the IMF’s more pessimistic forecast for Germany is mainly due to the great importance of foreign trade and the associated susceptibility to supply chain problems, there are also domestic problems in the USA. For example, in contrast to the situation in the other large industrialized countries, the number of employees is still well below the level before the pandemic began. In addition, President Joe Biden failed to get his planned $1.8 trillion climate, family and social program through Congress. That alone should reduce growth by 0.3 percentage points this year.
In the USA there is a growing danger that a wage-price spiral will start
The IMF also assumes that the US inflation rate, which reached its highest level in almost 40 years at seven percent in December, could still be over four percent at the end of 2022. At the same time, since employee salaries are rising much more sharply than in previous years, there is a growing danger that a wage-price spiral will set in motion that will be difficult to stop. In order to prevent this, the US Federal Reserve wants to end the zero interest rate policy and raise its key rates several times this year – which should further slow down economic growth. In the euro zone, on the other hand, the Monetary Fund considers a fall in the inflation rate to around two percent by the end of 2022 and thus to the target value of the European Central Bank to be possible.
On the other hand, the IMF is very concerned about China’s corona policy, which has so far aimed to prevent the spread of the virus through mass tests, the sealing off of entire cities and the strict surveillance of citizens. While this strategy has had some success in the previous corona waves, it is now reaching its limits because omicron is much more contagious than previous virus variants. In order to still achieve its zero-Covid goal, the government would have to drastically tighten its already strict isolation measures.
However, this would not be possible without large-scale plant closures, which in turn would have “dramatic effects on the economy” both in China and in the rest of the world, as IMF boss Kristalina Georgieva warned in an unusually undiplomatic way at the end of last week. In addition, the Chinese vaccines Sinovac and Sinopharm appear to have only a limited effect against Omikron. The country’s 1.4 billion citizens are largely defenseless against the youngest mutant that has just reached the People’s Republic.
After all: Georgiewa’s new deputy Gita Gopinath also encouraged the international community: If the latest corona wave subsides without Omikron being replaced by a new, possibly more dangerous variant, then a broad global economic upswing is possible from the spring, wrote the previous IMF Chief Economist in an article published alongside the Economic Outlook. However, the economic damage that Corona has caused worldwide can no longer be made up for – on the contrary: up to and including 2024, according to Gopinath, the growth losses are likely to add up to an almost unbelievable 13.8 trillion dollars (12.3 trillion euros).