COVID-19 ‘Fault Lines’ Cause IMF to Downgrade Forecast

Supply chain disruptions and inflation pressures weigh down the World Economic Outlook.

“Worsening pandemic dynamics,” such as supply chain disruptions and inflation pressures have compelled the International Monetary Fund (IMF) to downgrade its most recent World Economic Outlook, albeit only slightly.

The IMF projects the global economy will grow 5.9% in 2021, down from the 6% forecast it provided in its July outlook. However, it said it still expects the world’s economy to decelerate to 4.9% growth in 2022, which is unchanged from its forecast three months ago.

“The fault lines opened up by COVID-19 are looking more persistent,” the IMF said in its 152-page report. “Near-term divergences are expected to leave lasting imprints on medium-term performance. Vaccine access and early policy support are the principal drivers of the gaps.”

According to the report, the downward revision is due to supply disruptions to advanced economies and worsening pandemic dynamics for low-income developing countries. It also said that the rapid spread of the Delta variant of the coronavirus and the threat of new variants have increased uncertainty about how long it will be until the pandemic is over—or at least more manageable and predictable.

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Looking past 2022, the IMF projects global growth to slow to about 3.3% over the medium term. It expects advanced economies’ output to exceed pre-pandemic medium-term projections, thanks mostly to expected additional policy support in the US. Conversely, emerging market and developing economies are expected to have persistent output losses due to slower vaccine rollouts and less policy support compared with advanced economies.

Emerging and developing countries in Asia have the highest growth forecasts, led by India and China, which are expected to see real gross domestic product (GDP) growth of 9.5% and 8%, respectively, in 2021, and 8.5% and 5.6%, respectively, in 2022.  

Strong growth is also expected in South America for 2021, particularly in Chile and Peru, where GDPs are forecast to grow 11% and 10%, respectively. Meanwhile, Colombia and Argentina’s GDPs are expected to grow 7.6% and 7.5%, respectively. However, that growth is expected to slow down sharply in 2022 and fall to the low single digits.

As for inflation, the IMF said the risks are tilted toward the upside, particularly if pandemic-induced supply-chain bottlenecks persist for longer than expected, which would lead to rising inflation expectations, and thus monetary normalization in advanced economies sooner than anticipated. The report said that although central banks typically aren’t swayed into tightening by temporary inflationary pressures, they should be prepared to move quickly if the recovery improves faster than expected, or if risks of rising inflation expectations increase. It also said monetary policy may need to be tightened to get ahead of price pressures, even if that means delaying the recovery in employment.

“The alternative of waiting for stronger employment outcomes runs the risk that inflation increases in a self-fulfilling way, undermining the credibility of the policy framework and creating more uncertainty,” said the report, adding that “a spiral of doubt” could hold back private investment and lead to the kind of slower employment recovery central banks avoid when holding off on policy tightening.

“Overall, the balance of risks for growth is tilted to the downside,” the IMF said. “The major source of concern is that more aggressive SARS-CoV-2 variants could emerge before widespread vaccination is reached.”

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