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‘Widening fault lines’ unbalance global recovery

The global economic recovery is still on track, but it is being skewed more heavily towards advanced economies who are being buoyed by fiscal support, access to vaccines and improved health metrics, according to the International Monetary Fund (IMF).

Referencing widening fault lines in its July World Economic Outlook (WEO), the IMF said that while the global economy 2021 growth projection of 6% is unchanged from its April update, prospects for emerging market and developing economies have been marked down for 2021, especially for Emerging Asia. The slight rise in the 2022 forecast to 4.9% hangs on the gains of advanced economies outweighing the losses of emerging and developing economies.

The optimism is based on a broadening in merchandise trade, moving beyond the pandemic-related purchases, consumer durables, and medical equipment.

Commodity prices, meanwhile, are expected to rise “at a significantly faster pace” in 2021. Oil prices are projected to rise close to 60% above their low base in 2020, while non-oil commodity prices are expected to rise close to 30% above 2020 levels, reflecting strong increases in the price of metals and food.

Gita Gopinath, economic counsellor and director of the research department at the IMF, commented: “The global economic recovery continues, but with a widening gap between advanced economies and many emerging market and developing economies. Our latest global growth forecast of 6% for 2021 is unchanged from the previous outlook, but the composition has changed.”

She added that the recovery is not assured until the pandemic is beaten back globally and called for “concerted, well-directed policy actions at the multilateral and national levels” to address recovery imbalances.

Growth stars

As a result, US GDP growth is expected to rise 0.3 percentage point in 2021 and 1.1 percentage points in 2022. Trading partners will also benefit from the ripple recovery effect.

However, growth markdowns in emerging Asian economies have led to a 0.4 percentage point dip in 2021 expectations for emerging market and developing economies – to 6.3%. Within this decline, growth prospects in India have been downgraded following the second Covid wave in March–May. “Similar dynamics are at work in the ASEAN-5 group (Indonesia, Malaysia, Philippines, Thailand, Vietnam), where recent infection waves are causing a drag on activity,” added the WEO. China’s 2021 forecast is also down slightly – 0.3 percentage points – to 8.1% because of scaling back of public investment and overall fiscal support.

“These revisions reflect to an important extent differences in pandemic developments as the delta variant takes over,” said Gopinath. “Close to 40% of the population in advanced economies has been fully vaccinated, compared with 11% in emerging market economies, and a tiny fraction in low-income developing countries. Faster-than-expected vaccination rates and return to normalcy have led to upgrades, while lack of access to vaccines and renewed waves of Covid-19 cases in some countries, notably India, have led to downgrades.”

Policy divergences

Divergences in policy support are also noted by the IMF as contributing to the widening fault lines in economic recovery. Advanced economies have committed $4.6 trillion of announced pandemic related measures for 2021 and beyond, according to the IMF. However, for emerging market and developing economies most measures expired in 2020 and there is a need to rebuild fiscal buffers. “Some emerging markets like Brazil, Hungary, Mexico, Russia, and Turkey, have also begun raising monetary policy rates to head off upward price pressures,” noted the WEO.

“More persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation,” said the WEO. Inflation is also expected to remain high into 2022 in some emerging market and developing economies because of continued food price pressures and currency depreciations.

While more widespread vaccine access could improve the outlook, assessment risks are skewed towards the downside. “The emergence of highly infectious virus variants could derail the recovery and wipe out $4.5 trillion cumulatively from global GDP by 2025,” warned the IMF. Also, rapid tightening of financial conditions and weaker-than-expected stimulus spending could also derail growth recovery. “A worsening pandemic and tightening financial conditions would inflict a double hit on emerging market and developing economies and severely set back their recoveries,” the WEO concluded.
Source: The Baltic Briefing

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