IMF confirms global economic crisis

Emerging economies should brace themselves for possible difficult times as the US Federal Reserve prepares to raise interest rates and global economic growth slows due to the Omicron variant of Covid-19, the IMF warned on Monday .

The International Monetary Fund, which is due to release updated economic forecasts on Jan. 25, said for now, the global economic recovery from the ravages of the pandemic is expected to continue this year and next.

But “the risks to growth remain high due to the resurgence of the pandemic,” IMF economists Stephan Danninger, Kenneth Kang and Helene Poirson wrote in a blog post.

The highly contagious Omicron strain has spread like wildfire around the world since mid-December, causing a record number of new cases of Covid in the latest wave of the global health crisis.

Read more: IMF paints grim global economic outlook as stagflation looms

Omicron, which appears to cause less severe disease than previous strains of the coronavirus, is forcing countries to reinstate health measures that are hampering economic growth.

“Given the risk of this coinciding with faster Fed tightening, emerging economies should brace themselves for potential episodes of economic turmoil,” economists said, as these countries also face high inflation and sluggishness. considerably higher public debt.

The Fed has signaled that it will be lifting interest rate sooner and more aggressively than expected, in order to counter the soaring inflation in the United States that is hitting American households and consumption – the engine of economic growth in America.

Higher interest rates mean that the costs of financing some emerging economies with debt denominated in dollars will increase.

These countries are already lagging behind in the global economic recovery and therefore less able to absorb additional spending.

“While dollar borrowing costs remain low for many, concerns over domestic inflation and the stability of foreign funding drove several emerging markets over the past year, including Brazil, Russia and South Africa , to start raising interest rates, “the IMF said.

More rapid Fed rate hikes could shake financial markets and tighten financial conditions globally, according to the blog.

The risk is that there will be a slowdown in demand and trade in the United States, as well as capital flight and a depreciation of the dollar in emerging markets.

Read more: IMF: Recent COVID-19 Recession Could Be Worse Than 2009 Crisis

The IMF recommended that emerging countries “adapt their response according to their situation and their vulnerabilities”.

And central banks that raise interest rates to fight inflation should engage in “clear and consistent communication” so people better understand the need for price stability, the international lender said.

AFP with additional contribution from GVS News Desk

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