Rising inflation and supply disruptions threaten recovery


The International Monetary Fund (IMF) cut on Tuesday its forecasts for the world economy this year as supply disruptions and inflation threaten recovery. In its latest World Economic Outlook, the Washington-based lender expects global gross domestic product to grow by 5.9% in 2021, or 0.1 percentage points less than in the July report.

“This modest headline revision masks large downgrades for some countries,” Gita Gopinath, chief economist at the IMF, wrote in an accompanying blog. “The downgrade also reflects more difficult near-term prospects for the advanced economy group, in part due to supply disruptions.”

The United States 2021 growth was cut down one percentage point to 6%, due to large inventory drawdowns in the second quarter, in part reflecting supply disruptions, and softening consumption in the third quarter.

Germany saw its growth lowered by 0.5 percentage points to 3.1% in part because of shortages of key inputs weighing on manufacturing output.

Japan’s growth forecast was cut to 2.4% from 2.8%, reflecting the effect of the fourth State of Emergency from July to September .

China, the world’s second-largest economy, is expected to register growth of 8% this year, a tick down from the 8.1% the IMF had forecast in July.

For eurozone, the IMF predicts a 5% expansion this year and 4.3% in 2022.

IMF global growth
(Source: WEO IMF)

While growth in advanced economies is largely expected to return to pre-Covid trend next year, emerging market and developing economies (excluding China) are forecast to remain 5.5% below trend in 2024, the World Economic Outlook said.

As prices from food to fuel have risen world-wide, the Fund also raised its inflation outlook, urging policy makers to stand ready to take swift action.

“Monetary policy will need to walk a fine line between tackling inflation and financial risks and supporting the economic recovery” it said.

“Although central banks can generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics, they should be prepared to act quickly if the recovery strengthens faster than expected or risks of rising inflation expectations become tangible.”

Headline inflation is expected to peak in the final months of 2021 and return to pre-pandemic levels by mid-2022 for most economies. However, “given the recovery’s uncharted nature, considerable uncertainty remains, and inflation could exceed forecasts for a variety of reasons.”

In capital markets, the Fund said that “stretched asset valuations” meant investor sentiment could shift rapidly by adverse news on Covid-19 or policy. Amid pressing concerns are the impasse over the US federal debt limit and possible weakness in China’s property sector.

Looking further out, the IMF said if Covid-19 has a prolonged impact, it could reduce global GDP by $5.3 trillion over the next five years relative to current projections.