IMF cuts global growth forecast amid supply-chain disruptions, pandemic pressures

The International Monetary Fund has cut its growth forecast for the world economy for this year, but raised its inflation outlook.

The International Monetary Fund has cut its growth forecast for the world economy for this year, but raised its inflation outlook. Picture: Mandel Ngan/AFP

The International Monetary Fund lowered its growth forecast for the world economy for this year, citing supply-chain disruptions in rich economies and global-health concerns caused by the spread of the contagious Covid-19 Delta variant.

The group also raised its inflation outlook, urging policy makers to stand ready to take swift action if the recovery strengthens more quickly than expected or inflation risks become pronounced. Prices from food to medicine to vehicles have risen worldwide, threatening the global recovery after the pandemic wiped out businesses and jobs.

The IMF, a group made up of 190 member countries, promotes international financial stability and monetary co-operation. It also acts as a lender of last resort to countries in financial distress.

In the IMF’s latest World Economic Outlook report, released Tuesday, the group’s economists say the foremost policy priority is to vaccinate an adequate number of people in every country to prevent dangerous mutations of the virus. They stressed the importance for major economies to fulfil pledges to provide vaccines and financial support to international vaccination efforts before new variants knock a tenuous recovery off track. “Policy choices have become more difficult … with limited room to manoeuvre,” the IMF economists said in the report.

The IMF cut its global growth forecast for 2021 to 5.9 per cent from 6 per cent in its July report, a result of a reduction in its projection for advanced economies to 5.2 per cent from 5.6 per cent. The reduction mostly reflected problems with a global supply chain that caused a mismatch between supply and demand.

For emerging markets and developing economies, the outlook improved. Growth in these economies is pegged at 6.4 per cent for 2021, up from an estimate of 6.3 per cent in July. The uptick reflected stronger performances by some commodity-exporting countries amid rising energy prices.

The group maintained its view that the global growth will moderate to 4.9 per cent in 2022.

Among leading economics, the growth outlook for the US was trimmed 0.1 percentage point to 6 per cent this year, while the projection for China also was reduced by 0.1 percentage point to 8 per cent. Several other major economies saw their outlook cut, including Germany, whose economy now is projected to grow 3.1 per cent this year, down 0.5 percentage point from its July forecast. Japan’s outlook was lowered by 0.4 percentage point to 2.4 per cent.

While the IMF maintains the view that inflation will return to pre-pandemic levels by mid-2022, it also warns that the negative impact of inflation could grow further, if the pandemic-related supply-chain disruptions turn out to be more damaging and long-lasting. That could result in earlier tightening of monetary policy by central banks, holding back recovery.

IMF economists say that inflation outlook is “highly uncertain” due to the unprecedented nature of the current recovery. Despite the upward revision in its price projections, the forecast for inflation to return to pre-pandemic levels is based on an ample labour supply in advanced economies that should weigh on wages.

The IMF economists warn, however, some factors could add persistent inflationary pressure. Among them: a shortage of housing boosting real estate prices and rent ahead of new construction. Higher import prices of food and oil will also keep consumer prices elevated in emerging and developing countries. Prolonged supply disruptions too might push businesses to increase prices, leading to stronger demand for wage increases from workers.

“Should households, business and investors begin anticipating that price pressure from pent-up demand … to persist, there is a risk that medium-term inflation expectations could drift upward and lead to a self-fulfilling further rise in prices,” IMF economists wrote. They added that, for now, there are “no signs of such a shift.” Supply shortages caused by logistical bottlenecks, combined with stimulus-fed consumer appetite for goods, have caused rapid increases in consumer prices in the US, Germany and many other nations, the IMF says.

Food-price increases have put particularly grave burdens on households from poorer nations. The IMF’s food-and-beverage price index rose 11.1 per cent between February and August, with prices of meat and coffee rising 30 per cent and 29 per cent, respectively.

The IMF now expects consumer-price inflation in advanced economies to reach 2.8 per cent in 2021 and 2.3 per cent in 2022, up from 2.4 per cent and 2.1 per cent, respectively, in its July report. Inflationary pressure is even more pronounced in emerging and developing economies, with consumer prices rising 5.5 per cent this year and 4.9 per cent next year.

“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,” Gita Gopinath, IMF economic counsellor and director of research, wrote in the report.

While the increases in commodity prices have bolstered some emerging and developing economies, many of the world’s poorest countries have been left further behind, as they struggled to gain access to vaccines needed to open up their economies. More than 95 per cent of people in lower-income nations remain unvaccinated, a contrast to the vaccination rate of nearly 60 per cent in rich countries.

The IMF economists urged major economies to provide ample liquidity and debt relief for poorer nations with limited policy resources. “The dangerous divergence in economic prospects across countries remains a major concern,” Ms Gopinath says.

The Wall Street Journal