A slowing global recovery with risks of inflation amid IMF’s lower forecast

Mayank Chhaya


A pandemic-hobbled global economy may be recovering but its momentum has been weakened by a resurgent coronavirus even as inflation looms over the world, the International Monetary Fund (IMF) has said in its World Economic Outlook report.

Quite remarkably, the IMF also highlights a potentially catastrophic climate change as an “urgent priority” clearly articulating the long-term threats to global economic and societal well-being much after the pandemic’s effects have been addressed.

In the logistical realm, the IMF report points out global supply chain disruptions as yet another challenge to any global recovery.

“Fueled by the highly transmissible Delta variant, the recorded global COVID-19 death toll has risen close to 5 million and health risks abound, holding back a full return to normalcy. Pandemic outbreaks in critical links of global supply chains have resulted in longer-than-expected supply disruptions, further feeding inflation in many countries. Overall, risks to economic prospects have increased, and policy trade-offs have become more complex,” the IMF’s chief economist Gita Gopinath says.

Making an early reference to climate change, she says, “While reducing the likelihood of a prolonged pandemic is a key immediate global priority, another urgent priority is the need to slow the rise in global temperatures and contain the growing adverse health and economic effects of climate change. Stronger concrete commitments are needed at the upcoming United Nations Climate Change Conference (COP26).”

COP26 is being held in Glasgow from October 31 to November 12 and its overarching objective is to get countries to commit to ensure that the global temperature rise does not breach 1.5 degrees because of the greenhouse gases caused by fossil fuels and other related energy sources.

To that end the IMF calls on advanced countries to deliver on their earlier promises of mobilizing $100 billion of climate financing, annually, for developing nations.

For the United States, the growth forecast has been reduced to 6 percent from the 7 percent made as recently as July of this year. The global growth has been lowered to 5.9 percent from 6 percent, also made in July. The IMF, however, has kept the projection of 4.9 percent global growth for 2022 unchanged.

“The dangerous divergence in economic prospects across countries remains a major concern. Aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9 percent in 2024. By contrast, aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5 percent below the pre-pandemic forecast in 2024, resulting in a larger setback to improvements in their living standards,” the report says.

“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,” the IMF says.

“The headwind to growth is pandemic, the Delta variant being particularly severe. The supply chain disruptions that we are seeing that are affecting semiconductor chips but are also leading to the energy crisis that we are seeing in Europe and Asia. Inflation remains a concern in many parts of the world. I think these last two-three months have made it abundantly clear that we are all in this together, that the crisis isn’t over anywhere until it is over everywhere. That requires that we to a much wider vaccination coverage in different parts of the world. The countries will have to make sure that there is enough vaccine supply to the low-income countries and that they reduce vaccine hesitancy. That’s the only way we can ensure global prosperity,” Gopinath said in her sum-up video.

Gopinath’s mention of the vaccine supply has been significantly highlighted, particularly in terms of its terrible disparities between the developed world and the developing world.

In fact, the report maintains that “these dangerous economic divergences are a consequence of large disparities in vaccine access and in policy support.”

To drive home that point she says, “While almost 60 percent of the population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96 percent of the population in low-income countries remain unvaccinated.”

Even as vaccines started rolling out last year there were many experts who warned of the inevitable disparities in vaccine supplies and access between the developed world and the rest. The fact that 96 percent population of the low-income remain unvaccinated is a staggering moral failure for the world which, as Gopinath points out, has no option but to recover together and not individually. Supply chain disruptions caused by a variety of pandemic-related factors are a compelling example of why for instance it is not enough for the U.S. or Europe to recover. Unless the recovery is global-local economies will be seriously hampered as experienced by American consumers in the rising gas prices as well as dwindling stocks at stores.

At one point, the report also says, “Food price rises have unfortunately tended to concentrate in places where food insecurity is high, putting poorer households under greater stress and raising the specter of greater social unrest.”

In the specific context of India and China, the two giant economies which are key to global recovery as well as combating climate change, the IMF projects 9.5 percent real GDP for 2021 and 8.5 percent for 2022 for India while 8 percent and 5.6 percent respectively for 2021 and 2022 for China.

“India came out of a very very tough second wave that led to a big downgrade in July but we have no change as of now. There are many challenges that the Indian economy does face with regard to the financial market, with regard to the fact that the virus is not gone yet. India is doing well in terms of vaccination rates and that is certainly helpful,” Gopinath says.

The big picture and long-term takeaway from the IMF report, which it does not explicitly point out, is that while the pandemic is certainly a serious threat to the global economy what constitutes an existential threat to the planet is climate change as manifest in increasingly intense storms, forest fires, floods, droughts and overall disruptions in weather patterns across the world.