Home / Opinion / Views /  Mint explainer: 3 takeaways from the IMF World Economic Outlook

Monetary policy will be critical in the global battle against inflation, the International Monetary Fund (IMF) said in its latest World Economic Outlook report. The multilateral agency seems to suggest a coordinated action against inflation by central banks to prevent a harsh recession in many parts of the world.

Still, India appears to be much better placed, an outlier of sorts. It is projected to be the second-fastest growing major economy in 2022, next to Saudi Arabia, and the fastest growing in 2023.

The course of the global economy will also be shaped by the war in Ukraine and possible pandemic-related supply-side disruptions, the IMF report said. However, the war may also open doors for India to strike deals with Russia on energy supplies — both crude and gas — at bargain prices. China too is doing just that.

Here are the key takeaways from the IMF report:

The criticality of monetary policy

“The global economy’s future health rests critically on the successful calibration of monetary policy," the IMF asserted, adding “ … monetary policy could miscalculate the right stance to reduce inflation."

The IMF called for a relentless war against inflation, tightening monetary policies adequately, as inflation is the “most immediate threat" to current and future prosperity. However, it cautions against both under- and over-tightening. While under-tightening would entrench inflation, over-tightening would push the global economy into a hard recession.

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The report hints that a coordinated and concerted central bank action against inflation may be desirable to prevent over-tightening by central banks. Indeed, that may well be a prudent approach.

While ground realities vary across countries, and each country needs to tailor monetary policy to its needs, action by one central bank may impact inflation in other parts of the world. Many countries have faced the challenge of imported inflation over the past year, with hardening commodity and energy prices. “Policy paths in the largest economies could continue to diverge, leading to further US dollar appreciation and cross-border tensions," says the IMF.

Coordinated central bank action could lead to a softer landing for the world economy, containing the damage to global growth and demand as much as possible. “ …over-tightening is more likely when central banks act in an uncoordinated fashion," warns the IMF report.

India is projected to be the second-fastest growing major economy in 2022, next to Saudi Arabia, and the fastest growing in 2023.
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India is projected to be the second-fastest growing major economy in 2022, next to Saudi Arabia, and the fastest growing in 2023.

The world after the war in Ukraine

“The geopolitical re-alignment of energy supplies in the wake of Russia’s war against Ukraine is broad and permanent," says the IMF report. This will make winter 2022 challenging for Europe, but IMF expects winter 2023 to be worse.

Even as Russian gas supplies to Europe have dwindled to 20% of last year’s levels, major European economies have crafted energy independence plans by mid-2024. “The likelihood and magnitude of possible supply shortfalls is smaller today than assessed in July, because higher pipeline and LNG flows and gas demand compression have led to faster-than-expected storage accumulation in the EU in recent months," it said.

The European Union has plans to cut gas usage, and ship in LNG from the US and Qatar to tide over the crisis, but the next couple of years will be tough for member states, particularly Germany, its biggest economy.

This will open the doors for Asian giants India and China to cut deals with Russia on energy supplies. India “speedily ramped up Russian oil imports from 2% to 12%," finance minister Nirmala Sitharaman said a few days ago. Now, it may explore cheap gas supplies as well from Russia.

Meanwhile, China’s pipeline natural gas imports from Russia tripled in the first eight months of this year to $2.39 billion. Russia is already the biggest oil supplier to China.

The need for a more globalized economy

The IMF seems to be making a pitch for a globalized economy as well, arguing “successful multilateral cooperation will prevent fragmentation that could reverse the gains in economic well-being from 30 years of economic integration." Remember, many of the world’s biggest economies are aiming to become more insular and self-sufficient, more so after the supply-side shocks of the pandemic, from the US and India to even China. A coordinated approach by central banks will further the move towards globalization.

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