IMF warns of rising risks to the global economy

The global economic recovery from the coronavirus pandemic is weakening and risks are rising, according to the International Monetary Fund.

The IMF on Tuesday slashed its 2021 growth forecast for the United States by one full percentage point to 6%, the biggest reduction suffered by any G7 economy in its latest World Economic Outlook.

The cut reflects disruptions to supply chains and softening consumption in the third quarter, the IMF said.

The revision comes days after Goldman Sachs cut its growth forecasts for the US economy this year and next, citing weaker consumer spending and the winding down of the government’s Covid-19 relief programs.

The IMF now expects the global economy to grow 5.9% in 2021, 0.1 percentage points lower than the July forecast. The outlook for 2022 remained unchanged. Despite the modest revision, the organization said that economic risks have increased.

“Rapid spread of Delta and the threat of new variants have increased uncertainty about how quickly the pandemic can be overcome,” it said. “Policy choices have become more difficult, confronting multidimensional challenges — subdued employment growth, rising inflation, food insecurity, the setback to human capital accumulation, and climate change — with limited room to maneuver.”

Beware inflation and China real estate

The organization also cut its 2021 growth forecasts for China, Japan and Germany, the world’s next largest economies. It said that shortages of materials were weighing on manufacturing output in Germany, while in Japan emergency coronavirus measures implemented between July and September had dented the recovery.

China’s economy is expected to grow 8% in 2021, slightly less than the July forecast due to a scaling back of public spending, the IMF added. It also flagged “large scale, disorderly corporate debt defaults,” including in China’s property sector, as a risk to financial markets that could “reverberate widely.”

Overall, the balance of risks for the global economy is “tilted to the downside,” according to the IMF, which pointed to rising inflation fueled by higher commodity prices and mismatches between supply and demand following the pandemic.

Supply chain bottlenecks have led to shortages of a range of goods and astronomical increases in shipping costs, which are pushing up consumer prices. Although the IMF expects inflation to return to its pre-pandemic range across most economies next year, it said that a persistent supply-demand imbalance could keep prices elevated for longer, prompting central banks to hike interest rates sooner than expected.

Other risks to the growth outlook include a failure to lift the US debt ceiling, which could have “serious implications for financial markets,” it added.

Developing countries still grappling with the pandemic

The IMF was cautious about employment.

Disruptions to sectors such as hospitality and retail have caused the labor market recovery to “significantly lag” the recovery in economic growth in most countries, it said. Lower levels of employment are expected to persist, reflecting “possible lingering health concerns, replacement income under furlough schemes or unemployment benefits cushioning income loss, and the accelerated shift to automation.”

Labor markets in developing economies have been hardest hit. At the same time, large disparities in vaccine access and government support between richer and poorer countries is creating a “dangerous divergence in economic prospects,” IMF chief economist Gita Gopinath warned.

“The outlook for the low-income developing country group has darkened considerably due to worsening pandemic dynamics,” she added.

While almost 60% of people in advanced economies are fully vaccinated, with some individuals now receiving booster shots, about 96% of the population in low-income countries remains unvaccinated, according to the IMF.

That has significant implications for the pace of the recovery globally. Whereas output in advanced economies is expected to return to levels projected before the pandemic hit by 2022, output in developing economies is expected to remain 5.5% below pre-pandemic forecasts in 2024, resulting in a larger setback to improvements in living standards.

(Courtesy CNN)