IMF lowers growth estimate as global economy faces 'hobbled recovery'

Lender tells central banks to be 'vigilant' about inflation and warns of impact of uneven access to vaccines, Covid outbreaks and supply-chain disruption

The annual IMF and World Bank meetings started on Monday and are mostly virtual this year. They run until Sunday. AFP

The International Monetary Fund lowered its growth forecast for the global economy this year, which is now set for a “hobbled” recovery, owing to weakening momentum as result of Covid-19 outbreaks, uneven access to vaccines, supply chain disruptions and risks from rising inflation.

The fund revised down growth in 2021 to 5.9 per cent from its 6 per cent estimate in July, while keeping its 2022 projection unchanged at 4.9 per cent.

“The global recovery continues but the momentum has weakened, hobbled by the pandemic,” said Gita Gopinath, the IMF's chief economist.

“Pandemic outbreaks in critical links of global supply chains have resulted in longer-than-expected supply disruptions, further feeding inflation in many countries. Overall, risks to economic prospects have increased, and policy trade-offs have become more complex.”

The fund's revision reflects the effects of supply disruptions on advanced economies, which crimped their growth projections. In contrast, projections for some commodity exporters have been upgraded as a result of higher energy prices. The world economy could sustain as much as $5.3 trillion in losses over the next five years if the pandemic has a prolonged effect, the fund said.

Advanced economies are now set to grow by 5.2 per cent this year, compared with an earlier 5.6 per cent estimate. The US, the biggest of the group and world's largest economy, is forecast to expand 6 per cent instead of a previous 7 per cent estimate. The country's economy is now estimated to have shrunk 3.5 per cent last year.

Germany, Europe's largest economy, is set to expand 3.1 per cent. France the euro area's second-largest economy is forecast to grow 6.3 per cent. Japan, the world's third-largest economy, which ended its Covid-19 state of emergency on October 1, is projected to grow 2.4 per cent this year after shrinking 4.6 per cent in 2020. The UK, the world's fifth-largest economy, is expected to expand 6.8 per cent in 2021 after shrinking 9.8 per cent last year.

Persistent divergence and uneven economic recovery across countries is “dangerous” and “remains a major concern”, Ms Gopinath said.

Emerging market and developing economies are now projected to grow 6.4 per cent this year, with China and India hitting 8 per cent and 9.5 per cent, respectively.

The Middle East and Central Asia are forecast to grow 4.1 per cent after shrinking 2.8 per cent in 2020. Saudi Arabia, the Arab world’s largest economy, is forecast to grow 2.8 per cent instead of a previous 2.4 per cent estimate after shrinking 4.1 per cent last year. The kingdom, the world's largest exporter of oil has benefited from the rally of crude prices that have hit a three-year high. Oil prices are up about 60 per cent since the start of the year.

Futures prices point to oil prices averaging $65.7 per barrel in 2021, 59 per cent higher than the 2020 average and are expected to fall to $56.3 in 2026, according to the fund.

“Market tightness is expected to continue in line with the International Energy Agency’s oil demand recovery projections. Risks to oil prices are balanced in the near term,” it said.

Low income and developing countries are projected to expand 3 per cent, a downgrade from a previous 3.9 per cent forecast. LDCs saw their economies grow 0.1 per cent in 2020.

Advanced economies are expected to regain their pre-pandemic growth momentum in 2022 and exceed it by 0.9 per cent in 2024, according to the fund. However, emerging market and developing economies (excluding China) are expected to remain 5.5 per cent below the pre-pandemic forecast in 2024.

“These economic divergences are a consequence of large disparities in vaccine access and in policy support. While almost 60 per cent of the population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96 per cent of the population in low-income countries remain unvaccinated,” Ms Gopinath said.

“Emerging and developing economies, faced with tighter financing conditions and a greater risk of de-anchoring inflation expectations, are withdrawing policy support more quickly despite larger shortfalls in output.”

Supply disruptions have resulted in shortages of key inputs and dragged manufacturing activity lower in several countries, while also contributing to rising inflation as demand rebounds and commodity prices rise, according to the fund. Food prices have increased the most in low-income countries.

“Monetary policy will need to walk a fine line between tackling inflation and financial risks and supporting the economic recovery. We project, amid high uncertainty, that headline inflation will likely return to pre-pandemic levels by mid-2022 for the group of advanced economies and emerging and developing economies,” Ms Gopinath said.

Governments and central banks across the world have provided more than $16 trillion of fiscal and $9tn of monetary support to help economies recover.

“While monetary policy can generally look through transitory increases in inflation, central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery. Central banks should chart contingent actions, announce clear triggers, and act in line with that communication.”

The fund said central banks should “remain vigilant about the possible inflationary effects of recent monetary expansions because their balance sheets have reached historically high levels in several countries and due to the concomitant effects of large fiscal stimulus during the Covid-19 pandemic".

Inflation in advanced economies is forecast at 2.8 per cent this year, while it is projected at 5.5 per cent in emerging market and developing economies. Global food prices have increased nearly 40 per cent since the start of the pandemic, presenting serious implications for low-income countries, according to the fund.

Central banks should “refrain from asset purchases if they operate under weak independence and in the context of high inflation and precarious fiscal positions,” the IMF said.

Looking ahead, Ms Gopinath said addressing the uneven recovery requires greater multilateral cooperation for every country to vaccinate at least 40 per cent of its population by the end of 2021 and 70 per cent by mid-2022. She called on vaccine manufacturers and high-income countries to support the expansion of regional production of Covid vaccines in developing countries through financing and technology transfers.