The International Monetary Fund warned on Tuesday that "uncertainty remains high" as it maintained a six per cent global growth projection for 2021 while cutting its forecast for several developing nations, including India, struggling with surging Covid-19 infections.
“There is a risk inflation will prove to be more than just transitory,” the Washington-based institution cautioned in its latest World Economic Outlook as it pushed central banks to take pre-emptive action.
The economic recovery from the pandemic, even in places where infections look under control, will not be assured until the pandemic is “beaten back” around the world, said the Fund.
Economists at the IMF said they have detected a troubling trend. Rich countries are growing faster while developing economies, especially poorer Asian countries, are slumping.
“Only global economies working in tandem can reverse this trend.”
“Concerted, well-directed policy actions at the multilateral and national levels can make the difference between a future where all economies experience durable recoveries or one where divergences intensify, the poor get poorer, and social unrest and geopolitical tensions grow,” said Gita Gopinath, the IMF’s chief economist, in a blog post accompanying the new forecast.
While India’s growth forecast was lowered by three percentage points to 9.5 per cent, the Fund upgraded its outlook for the US and other wealthy economies. It also reduced its forecast for China by 0.3 percentage point, citing “a scaling back of public investment and overall fiscal support,” and for Saudi Arabia by 0.5 per cent.
India witnessed the largest drop in growth projections made by the IMF for the current fiscal year even as the global economic growth rate remains the same.
However, for the next fiscal 2022-23, the IMF revised the growth projection for India up from 6.9 per cent to 8.5 per cent it had projected in April 2021 - higher by 1,6 percentage points.
Revising its expectations for 2022, the Fund now sees a global growth rate of 4.9 per cent in 2022 instead of a gross domestic product rate of 4.4 per cent as predicted in April.
"The 0.5 percentage point upgrade for 2022 derives largely from the forecast upgrade for advanced economies, particularly the US, reflecting the anticipated legislation of additional fiscal support in the second half of 2021 and improved health metrics more broadly across the group," the IMF said.
Gopinath said a more persistent supply disruptions and sharply rising housing prices are some of the factors that could lead to persistently high inflation.
She also warned that inflation is expected to remain elevated into 2022 in some emerging market and developing economies, related in part to continued food price pressures and currency depreciations.
“Close to 40 per cent of the population in advanced economies has been fully vaccinated, compared with 11 per cent in emerging market economies, and a tiny fraction in low-income developing countries,” Gopinath said.
“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,” she said.
The IMF now expects the US to grow at 7.0 per cent in 2021 and 4.9 per cent in 2022 - up 0.6 and 1.4 percentage points, respectively, from the forecasts in April. The projections assume the US Congress will approve President Joe Biden’s roughly $4 trillion in proposed infrastructure, education and family support spending largely as envisioned by the White House.
The Fund forecast lower prospects for Indonesia, Malaysia, the Philippines, Thailand and Vietnam where recent waves of Covid-19 infections are weighing on activity for Saudi Arabia at 0.5 per cent.
It forecast that emerging Asia would grow 7.5 per cent this year, down 1.1 percentage points from the April forecast.
Low-income countries saw a downgrade of 0.4 percentage point in their 2021 growth, with the Fund citing the slow rollout of vaccines as the main factor impeding their recovery.
The IMF said downside risks remain significant globally, including the potential for new, highly contagious coronavirus variants to lead to new restrictions on movement and reduced economic activity. In one scenario affecting both emerging markets and advanced countries with high vaccine hesitancy, the Fund said 0.8 percentage point could be shaved from global GDP growth this year and in 2022.