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IMF Downgrades Global Economic Outlook, Citing Virus Risks

The global economic recovery is continuing, even as the pandemic re-surges, according to the latest “World Economic Outlook” from the International Monetary Fund (IMF) released Tuesday.

IMF said the fault lines opened up by Covid-19 are looking more persistent, with near-term divergences expected to leave lasting imprints on medium-term performance. Vaccine access and early policy support are the principal drivers of the gaps.

The global economy is now projected to grow 5.9 percent in 2021 and 4.9 percent in 2022, 0.1 percent lower for 2021 than in the IMF July forecast. The downward revision for 2021 reflects a downgrade for advanced economies–in part due to supply disruptions–and for low-income developing countries, largely the result of worsening pandemic dynamics.

This is partially offset by stronger near-term prospects among some commodity-exporting emerging market and developing economies. The rapid spread of Covid-19’s Delta variant and the threat of new mutations have increased uncertainty about how quickly the pandemic will subside. Policy choices have become more difficult, with limited room to maneuver.

Beyond 2022, global growth is projected to moderate to about 3.3 percent over the medium term, according to the report. Advanced economic activity is forecast to exceed pre-pandemic, medium-term projections, largely reflecting sizable further policy support in the United States that’s expected to include measures to increase potential output. By contrast, persistent output losses are anticipated for the emerging market and developing economy group due to slower vaccine rollouts and generally less policy support compared to advanced economies.

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IMF noted that headline inflation rates have increased in the U.S. and in some emerging market and developing economies. IHS Markit on Monday downgraded its 2021 U.S. gross domestic product (GDP) forecast to 5.4 percent growth from 5.7 percent based on Delta variant impacts and supply chain shortages.

However, Joel Prakken and Chris Varvares, co-heads of U.S. economics at IHS Markit, said progress on vaccinations and the gradual resolution of supply disruptions and labor shortages will shift growth lost in late 2021 to later years.

The global economic recovery is continuing, even as the pandemic resurges, according to the latest “World Economic Outlook” from the IMF.
The downward revision for 2021 reflects a downgrade for advanced economies, in part due to supply disruptions. enanuchit/Adobe

“Near-term price and cost pressures will push CPI inflation to 4.3 percent this year and an upward-revised 3 percent in 2022, from 2.3 percent, after which we expect inflation to subside close to the Fed’s long-run 2 percent objective,” Prakken said.

IMF noted that in most cases, rising inflation reflects pandemic-related supply-demand mismatches and higher commodity prices compared to their low base from a year ago, the report said.

For the most part, price pressures are expected to subside in 2022. In some emerging market and developing economies, price pressures are expected to persist based on elevated food prices, lagging effects of higher oil prices and exchange rate depreciation lifting the prices of imported goods.

“However, great uncertainty surrounds inflation prospects, primarily stemming from the path of the pandemic, the duration of supply disruptions and how inflation expectations may evolve in this environment,” IMF said.

It is critical to increase efforts to curb greenhouse gas emissions–current actions and pledges are not enough to prevent a dangerous overheating of the planet, the report stated. The international community should also resolve trade tensions and reverse the trade restrictions implemented in 2018-19, strengthen the rules-based multilateral trading system, and complete an agreement on a global minimum for corporate taxes “that halts a race to the bottom and helps bolster finances to fund critical public investments,” IMF said.

In addition, it is important to deal with the challenges of the post-pandemic economy, such as reversing the pandemic-induced setback to human capital accumulation, facilitating new growth opportunities related to green technology and digitalization, reducing inequality and ensuring sustainable public finances, IMF added.