By Andrea Shalal

WASHINGTON, (Reuters) – The International Monetary Fund has cut its global growth forecast by almost a whole percentage point on Tuesday. It cited Russia’s conflict in Ukraine and warned that inflation is now a “clear, present danger” to many countries.

In its World Economic Outlook, the IMF stated that war would slow growth and cause inflation to rise further, but warned that it was not a forecast with “unusually high levels of uncertainty.”

Further sanctions on Russian energy and a widening of the war, a sharper-than-forecast deceleration in China and a renewed flare-up of the pandemic could further slow growth and boost inflation, while rising prices could trigger social unrest.

The global lender, which downgraded its forecasts for the second time this year, said it now projects global growth of 3.6% in 2022 and 2023, a drop of 0.8 and 0.2 percentage point from its January forecast, given the war’s direct impacts on Russia and Ukraine and global spillovers.

The medium-term growth rate of global economic growth will be 3.3%, down from an average 4.1% over the same period in 2013 and 6.1% by 2021.

Pierre-Olivier Gourinchas, chief economist at IMF, wrote that the “global economic prospects” have suffered from Russia’s invasion of Ukraine. He published this blog Tuesday along with the revised outlook.

Inflation has been rising already in many countries because of imbalances between supply and demand due to the pandemic. The latest China lockdowns are likely to create new supply chain bottlenecks.

According to the IMF, 5 million Ukrainians were forced from their homes by the war that Russia calls a “specially military operation”.

Russia and Ukraine would experience sharp contractions in both their economies. The European Union, which relies heavily on Russian energy, saw its growth forecast for 2022 cut by 1.1 percentage point.

“The war contributes to the string of supply shocks that have hit the global economic system in the past years.” Like seismic waves, its effects will propagate far and wide — through commodity markets, trade, and financial linkages,” Gourinchas said.

While Russia had reduced its oil, gas, metals and other resources, this caused high prices in Europe and Central Asia. It also hurt lower income households worldwide.

The IMF reported that it had revised downward its medium term outlook for all group except commodities exporters. It also said the recovery of advanced economies to pre-pandemic production trends would be slower. Divergence between developed and advanced economies could persist suggesting some residual scarring due to the pandemic.

Clear and Present Danger

The IMF projected that inflation would remain high for longer as a result of war-induced increases in commodity prices and widening price pressures. However, it cautioned that things could get worse if imbalances between supply and demand grow.

It forecasted inflation at 5.7% for advanced countries and 8.7% for emerging markets and developing economies in 2022. This is a leap of 1.8 to 2.8 percentage points over January’s prediction.

Gourinchas said in the blog, “Inflation is a clear threat to many countries.”

According to him, the U.S. Federal Reserve as well as many central banks have already taken steps toward tightening their monetary policies. However, war-related disruptions are increasing those pressures.

According to the IMF, there is a growing risk of inflation expectations becoming de-anchored. This would prompt a more aggressive tightening response that could place pressure on an even wider variety emerging market economies.

Emerging markets and countries in developing nations experienced tighter financial conditions immediately following the invasion. Although the repricing process was “mostly orderedly”, further tightening and capital outflows were possible.

This war also raised the possibility of permanent fragmentation in the global economy, with different technology standards and cross-border payments systems.

“Such a ‘tectonic shift’ would cause long-run efficiency losses, increase volatility and represent a major challenge to the rules-based framework that has governed international and economic relations for the last 75 years,” Gourinchas said.