World Economic Outlook Update, July 2021: Fault Lines Widen in the Global Recovery

World Economic Outlook, July 2021

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The global economy is projected to grow 6.0 percent in 2021 and 4.9 percent in 2022.
The 2021 global forecast is unchanged from the April 2021 WEO, but with offsetting revisions across country groups.
Prospects for emerging market and developing economies have been marked down for 2021, especially for Emerging Asia.
The forecast for advanced economies is revised up.
The 0.5 percentage-point upgrade for 2022 derives largely from the forecast upgrade for advanced economies, particularly the United States, reflecting the anticipated legislation of additional fiscal support in the second half of 2021 and improved health metrics more broadly across the group.

Vaccine access has emerged as the principal fault line along which the global recovery splits into two blocs:
- Almost all advanced economies can look forward to further normalization of activity later this year.
- Many other economies will still face resurgent infections and rising COVID death tolls.
The recovery is not assured even in countries where infections are currently very low so long as the virus circulates elsewhere.

Recent price pressures for the most part reflect unusual pandemic-related developments and transitory supply-demand mismatches.
Inflation is expected to return to its pre-pandemic ranges in most countries in 2022 once these disturbances work their way through prices, though uncertainty remains high.
Elevated inflation is also expected in some emerging market and developing economies, related in part to high food prices.
Policy guidance:
- Central banks should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics.
- Clear communication from central banks on the outlook for monetary policy will be key to shaping inflation expectations and safeguarding against premature tightening of financial conditions.
- There is a risk that transitory pressures could become more persistent and central banks may need to take preemptive action.

Slower-than-anticipated vaccine rollout would allow the virus to mutate further.
Financial conditions could tighten rapidly, for instance from a reassessment of the monetary policy outlook in advanced economies if inflation expectations increase more rapidly than anticipated.
A double hit to emerging market and developing economies from worsening pandemic dynamics and tighter external financial conditions would severely set back their recovery and drag global growth below this outlook’s baseline.

Immediate multilateral priority: deploy vaccines equitably worldwide.
IMF staff proposal: $50 billion proposal, jointly endorsed by the World Health Organization, World Trade Organization, and World Bank, provides clear targets and pragmatic actions at a feasible cost to end the pandemic.
Liquidity and reserve enhancement:
- Financially constrained economies need unimpeded access to international liquidity.
- The proposed $650 billion General Allocation of Special Drawing Rights at the IMF is set to boost reserve assets of all economies and help ease liquidity constraints.
Climate action: Countries also need to redouble collective efforts to reduce greenhouse gas emissions.
National-level policies tailored to the stage of the crisis can catalyze a sustainable, inclusive recovery.
Concerted, well-directed policies can determine whether the future is one of durable recoveries for all economies or one with widening fault lines.

Source: World Economic Outlook Update, July 2021: Fault Lines Widen in the Global Recovery