A Disrupted Global Recovery

IMF Blog, January 25, 2022

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Author: Gita Gopinath
Date: January 25, 2022
Theme: The global recovery in the third year of the pandemic is slowing as economies face supply disruptions, higher inflation, record debt, and persistent uncertainty.

IMF projects global growth in 2022 at 4.4 percent.
This 2022 projection is 0.5 percentage point lower than previously forecast, mainly due to downgrades for the United States and China.
Global growth is expected to slow to 3.8 percent in 2023.
The 2023 projection is 0.2 percentage point higher than in the October 2021 WEO, reflecting a pickup after current drags dissipate.
Specific drivers of downgrades:
- United States: lower prospects of legislating the Build Back Better fiscal package, earlier withdrawal of extraordinary monetary accommodation, and continued supply disruptions.
- China: continued retrenchment of the real estate sector and weaker-than-expected recovery in private consumption.
- Other countries (e.g., Germany): markdowns due to supply disruptions.
Omicron effects: expected to weigh on activity in Q1 2022 but to fade starting in Q2 2022.

2022 inflation forecasts have been revised up for both advanced and emerging market and developing economies.
Elevated price pressures are expected to persist for longer.
Assumptions for 2022:
- Supply-demand imbalances decline based on industry expectations of improved supply and a gradual rebalancing of demand from goods to services.
- Extraordinary policy support is withdrawn.
- Energy and food prices are expected to grow at more moderate rates in 2022 according to futures markets.
Conditional expectation: Assuming inflation expectations remain anchored, inflation is expected to subside in 2023.

Advanced economies are projected to return to pre-pandemic trend in 2022.
Several emerging markets and developing economies are projected to have sizeable output losses into the medium-term.
The number of people living in extreme poverty is estimated to have been around 70 million higher than pre-pandemic trends in 2021, setting back poverty reduction by several years.

Priority: break the hold of the pandemic through widespread vaccination, testing, and access to therapeutics, including newly developed anti-viral medications.
Vaccination disparity:
- Low-income countries: 4 percent of the population are fully vaccinated.
- High-income countries: 70 percent of the population are fully vaccinated.
Urgent needs:
- Close the $23.4 billion financing gap for the Access to COVID-19 Tools (ACT) Accelerator.
- Incentivize technological transfers to diversify global production of critical medical tools, especially in Africa.
- Provide assistance to boost absorptive capacity and improve health infrastructure in low-income developing countries.

Policies should be tailored to country-specific circumstances, including extent of recovery, underlying inflationary pressures, and available policy space.
Fiscal policy:
- Fiscal deficits in most countries are projected to shrink in 2022 as policy space diminishes in some economies and recoveries strengthen in others.
- Fiscal priority should continue to be the health sector; transfers should be effectively targeted to the worst affected.
- Initiatives should be embedded in medium-term fiscal frameworks that lay out a credible path for public debt sustainability.
Monetary policy:
- Where inflation is broad-based alongside a strong recovery (e.g., United States), or where high inflation risks becoming entrenched, extraordinary monetary support should be withdrawn.
- Several central banks have already begun raising interest rates to preempt price pressures.
- Clear communication of the policy transition toward tightening is key to ensure orderly market reactions.
- Where core inflationary pressures remain subdued and recoveries are incomplete, monetary policy can remain accommodative.

As monetary policy tightens globally, economies must adapt to higher interest rates.
Emerging market and developing economies with large foreign currency borrowing and external financing needs should:
- Prepare for possible turbulence in financial markets.
- Extend debt maturities as feasible.
- Contain currency mismatches.
- Use exchange rate flexibility to help macroeconomic adjustment.
- Consider foreign exchange intervention and temporary capital flow management measures where needed to provide monetary policy space to focus on domestic conditions.

Low-income countries face increasing difficulty servicing debt as interest rates rise.
60 percent of low-income countries are already in or at high risk of debt distress.
Recommendation: Revamp the G20 Common Framework to deliver more quickly on debt restructuring.
G20 creditors and private creditors should suspend debt service while restructurings are being negotiated.

Education: policies needed to reverse large learning losses suffered by children, especially in developing countries.
- On average, students in middle-income and low-income countries had 93 more days of nation-wide school closures than those in high income countries.
Climate: accelerate efforts to reach net-zero carbon emissions by 2050 through:
- Carbon pricing mechanisms.
- Green infrastructure investment.
- Research subsidies.
- Financing initiatives to enable all countries to invest in mitigation and adaptation.

Global death toll at the start of the third year of the pandemic: 5.5 million deaths.
Accompanying economic losses are expected to be close to $13.8 trillion through 2024 relative to pre-pandemic forecasts.
The author notes these losses would have been much worse without scientific, medical, and policy responses.

Source: A Disrupted Global Recovery — IMF blog page by Gita Gopinath, January 25, 2022.