BRACE YOURSELVES: Economist warns over IMF’s “gloomy” projections on inflation

BRACE YOURSELVES: Economist warns over IMF’s “gloomy” projections on inflation

NASSAU, BAHAMAS — With the International Monetary Fund (IMF) now predicting that inflation this year will hit 9.5 percent in emerging markets and developing economies like The Bahamas, consumers should be concerned over “skyrocketing” food and gas prices and seeing their purchasing power diminish even further, a governance reformer has warned.

The IMF’s projections in the latest World Economic Report — titled “Gloomy and More Uncertain” cited further negative spillovers from the war in Ukraine; higher-than-expected inflation worldwide and a worse-than-anticipated slowdown in China as reasons for its revision to its global economic growth projections.

The IMF has reduced its growth expectation for 2022 to 3.2 percent which is about half a percentage point lower than what it had previously predicted. 

Hubert Edwards, head of the Organization for Responsible Governance’s (ORG) Economic Committee, said: “The IMF’s downward revision of global growth is significant for two important reasons. Firstly, it continues a trajectory started in April this year where there was an initial downgrade and secondly when coupled with the risk factors and potential headwinds there is every suggestion that this could continue into the next two quarters of the year.

“Importantly, global output has reduced for one quarter so far. While the world has shown great resilience against the emergence of a recession these developments bring us closer to that possibility. The two most significant drivers, in my mind, which The Bahamas needs to keep an eye on, is the performance of China given its global impact and spillover risk of its lower than expected growth.”

He said: “China is a major factor, near ubiquitous in instances, in many global supply chains and its continued underperformance remains highly influential on global output and increases the risk of a downturn.”

Edwards said that this development coupled with the Russia-Ukraine war which is driving inflation, especially through food and energy, could exacerbate the ongoing – even if improving – supply chain shock the world is experiencing. 

“With global inflation revised upwards, anticipated 9.5 percent in economies like The Bahamas, local consumers should be concerned about food and gas prices continuing to skyrocket and diminished purchasing power, at a time when the government appears to be least capable of facilitating substantial relief,” he continued.

“More broadly, the adverse impact on the standard of living and the efforts advanced economies might exert in seeking to tame inflations should be a concern for real policy makers. The latter holds important implications for the country’s debt stock and narrowing of an already very tight fiscal space,” said Edwards.

He noted that The Bahamas has experienced notable fiscal consolidation.

“We hope that the indications pointed out by the IMF do not crystalize disrupting our nascent recovery and deepen challenges for our debt management,” Edwards said.

“It is important though that both policy makers demonstrate a clear appreciation of the environment and make the requisite adjustments, contemplate practical contingencies and be willing to adjust policies prudently, should the circumstances dictate as such, especially as it relates to supporting vulnerable segments of the population. This is also instructive for individuals and households. Personal financial planning should be respectful of the risks meandering on the economic horizon.”

In its report, the IMF said the risks to the outlook are “overwhelmingly tilted to the downside”.

“The war in Ukraine could lead to a sudden stop of European gas imports from Russia; inflation could be harder to bring down than anticipated either if labor markets are tighter than expected or inflation expectations unanchor; tighter global financial conditions could induce debt distress in emerging market and developing economies; renewed COVID-19 outbreaks and lockdowns, as well as a further escalation of the property sector crisis, might further suppress Chinese growth; and geopolitical fragmentation could impede global trade and cooperation,” the report read.

“A plausible alternative scenario in which risks materialize, inflation rises further, and global growth declines to about 2.6 percent and 2.0 percent in 2022 and 2023, respectively, would put growth in the bottom 10 percent of outcomes since 1970.”

The IMF said that with increasing prices continuing to squeeze living standards worldwide, taming inflation should be the first priority for policymakers.

“Tighter monetary policy will inevitably have real economic costs, but the delay will only exacerbate them,” the IMF report continued.

“Targeted fiscal support can help cushion the impact on the most vulnerable, but with government budgets stretched by the pandemic and the need for a disinflationary overall macroeconomic policy stance, such policies will need to be offset by increased taxes or lower government spending.”