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IMF warns supply snarls slowing global recovery

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International Monetary Fund (IMF) chief economist Gita Gopinath. AFP

IMF warns supply snarls slowing global recovery

Worldwide supply chain disruptions are driving price increases and draining momentum out of economies recovering from the Covid-19 pandemic, the International Monetary Fund (IMF) warned on October 12.

The ongoing hit from the pandemic and the failure to distribute vaccines worldwide is worsening the economic divide and darkening prospects for developing nations, the IMF said in its latest World Economic Outlook.

The global economy is expected to grow 5.9 per cent this year, only slightly lower than projected in July, before slowing to 4.9 per cent in 2022, the report said.

But the overall figures mask large downgrades and ongoing struggles for some countries, including the US, Germany and Japan that are feeling the impact of supply bottlenecks, IMF chief economist Gita Gopinath said.

“This recovery is really quite unique,” she told AFP on the sidelines of the annual meetings of the IMF and World Bank.

Despite a strong return in demand, “the supply side has not been able to come back as quickly”, hampered in part by the spread of the Delta variant of Covid-19, which has made workers reluctant to return to their jobs.

Those labour shortages are “feeding into price pressures” in major economies, she said, slowing growth expectations this year.

Energy prices have hit multi-year highs in recent days, with oil above $80 a barrel, weighing on households.

But Gopinath said she expects energy prices to begin to retreat by the end of the first quarter of 2022.

In low-income developing countries, the outlook “has darkened considerably due to worsening pandemic dynamics”, she said in a blog post on the new forecasts.

The setbacks, which she blamed on the “great vaccine divide”, will impact the restoration of living standards, and a prolonged pandemic downturn “could reduce global GDP [gross domestic product] by a cumulative $5.3 trillion over the next five years”, she warned.

“The dangerous divergence in economic prospects across countries remains a major concern,” Gopinath said.

Advanced economies are expected to regain “pre-pandemic trend path in 2022 and exceed it by 0.9 per cent in 2024”, she said.

However, in emerging market and developing economies, excluding China, output “is expected to remain 5.5 per cent below the pre-pandemic forecast in 2024”.

Amid the danger of long-term scarring, “the foremost policy priority is therefore to vaccinate at least 40 per cent of the population in every country by end-2021 and 70 per cent by mid-2022”, she said.

The world’s largest economy has benefitted from massive fiscal stimulus, but the Delta wave and the supply issues have undermined progress, prompting the IMF to slash the US growth forecast for this year to six per cent, a full percentage point off the July figure.

US growth is expected to slow to 5.2 per cent next year, slightly faster than previously expected, but policymakers will face a delicate balancing act amid risks of rising inflation and lagging employment, the fund noted.

Wages also threaten to rise as employers compete for scarce workers, Gopinath noted.

While inflation is expected to return to “more normal levels” by mid-2022 in most countries, it could take longer in the US, she told reporters.

“There is tremendous uncertainty, we have never seen a recovery of this kind,” she said, noting labour shortages plaguing employers even amid high unemployment, and supply unable to meet demand.

US consumer prices rose 5.3 per cent annually in August, more than double the Federal Reserve’s two-per-cent goal. Markets on October 13 were watching for the government’s September inflation report.

US Treasury Secretary Janet Yellen said she believes the price increases will be “transitory”.

“But I don’t mean to suggest that these pressures will disappear in the next month or two,” she told CBS News. “This is an unprecedented shock to the global economy.”

However, if higher inflation becomes entrenched, it could force central banks to respond aggressively, and rising interest rates would slow the recovery, the IMF cautioned.

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