Australia’s Delta downgrade worst in the world, says IMF

Australia’s economy suffered the largest blow globally from the Delta strain, according to the IMF’s latest World Economic Outlook, ahead of an expected rebound in 2022.

IMF chief economist Gita Gopinath says the enormous vaccination gap between the rich and poor countries would remain a major drag on world growth and raised the risk of new, more aggressive Covid strains appearing. Picture: AFP

Australia’s economy suffered the largest blow globally from the Delta strain, according to the IMF’s latest World Economic Outlook, ahead of an expected rebound in 2022.

The International Monetary Fund in its latest global report card sharply downgraded Australian economic growth for 2021 from the 5.3 per cent predicted in July, to 3.5 per cent.

This was by far the largest downgrade contained in the newly released WEO, as the Delta outbreak forced Greater Sydney and then Victoria and the ACT into damaging lockdowns from which they are only now starting to emerge.

In contrast, the IMF only marginally downgraded world growth in 2021 to 5.9 per cent this year, from 6 per cent in the July update.

Real GDP among advanced economies was predicted to grow by 5.2 per cent this year, or 0.4 percentage points less than anticipated in the last quarterly WEO.

The US also suffered a significant downgrade, with growth over this year expected to be one percentage point lower than expected in July, at 6 per cent.

Treasury expects the Delta lockdowns will drive an economic contraction of “at least” 2 per cent in the September quarter, but Reserve Bank governor Philip Lowe – and private sector economists – are optimistic a scheduled lifting of restrictions will spark a resurgence of activity and drive employment higher in coming months and into next year.

Accounting for the lower starting point and anticipating a rebound, the IMF upgraded Australia’s real GDP growth next year from 3 per cent to 4.1 per cent. Advanced economies will return to their pre-pandemic paths by 2022, the report said.

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

“Health risks abound, holding back a full return to normalcy,” she said.

 

Dr Gopinath noted that the Delta variant had pushed the recorded global Covid-19 death toll to nearly five million, and rich countries needed to stay committed to vaccinating the populace in poorer countries.

The IMF’s top economist said while more than 60 per cent of the population in advanced economies were fully vaccinated – with some receiving booster shots – about 96 per cent of the population in low-income countries remained unvaccinated.

“Recent developments have made it abundantly clear we are all in this together and the pandemic is not over anywhere until it is over everywhere,” Dr Gopinath said.

“If Covid-19 were to have a prolonged impact – into the medium-term – it could reduce global GDP by a cumulative $5.3 trillion over the next five years relative to our current projection.”

 

As energy prices surged in recent weeks, the IMF warned that global supply disruptions were having an inflationary impact on some developed countries and had pushed food prices higher in the emerging world.

But the IMF’s economists expect this inflation to prove transitory. “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,” the report said.

“There is, however, considerable heterogeneity across countries, with upside risks for some, such as the US, the UK, and some emerging market and developing economies. Central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery.”

 

The IMF said the emergence of a new, more aggressive Covid-19 strain remained a clear risk to the global outlook.

And if the growth outlook was tilted to the downside, the risk for inflation was that recent consumer price rises could prove larger and more persistent than expected, should global supply disruptions linger.

This “risked a faster than anticipated monetary normalisation in advanced economies”, the report said, adding central bankers would “need to walk a fine line between tackling inflation and fin­ancial risks, and supporting the economic recovery”.