IMF lowers global growth outlook: warns of inflation and supply chain disruptions

IMF lowers global growth outlook: warns of inflation and supply chain disruptions

The International Monetary Fund (IMF) in its latest World Economic Outlook  published on October 12 lowered its global growth forecast to 5.9 per cent, down from the 6 per cent projected in July this year. However, it left a 2022 global growth forecast unchanged at 4.9 per cent. Beyond 2022, however, the IMF forecasts a moderate global growth level of 3.3 per cent over the medium term. The revised outlook for 2021 comes amid supply chain disruptions in advanced economies and worsening health situation in emerging economies.

The IMF has warned of inflationary pressures in the global economy that will constrain the global economic recovery from the Covid-19 pandemic. It has further cautioned that rising prices will lead to a push for higher wages. Consumer prices have  shown a rising trend over the last few months, largely caused by supply chain bottlenecks and higher commodity prices, especially fuel prices. It is now widely considered that the global supply chain disruptions could lead to stagflation.

This rising inflation expectation has ramped up the pressure on central banks to ease off their stimulus programmes earlier than anticipated. The IMF further warned that "inflation risks are skewed to the upside and could materialise if pandemic induced supply-demand mismatch continues longer than expected."

Overall, an economic situation has emerged where rising demand  and constrained supply can lead to creating inflationary pressure. The post-Covid 19 economic recovery in all likelihood will be marked by a longer term mismatch of supply and demand, pushing up prices.

Consumer prices in the US rose by 5.4 per cent in July this year on year on year basis. This is the biggest rise in consumer prices in the US since August 2008. Also, in the Euro-Zone area, inflation reached a 13 year high in September this year. Furthermore, the emerging concerns about  the rise of inflation expectations are not just the result of immediate economic forces  but also reflect longer term changes in the structure of the global economy.

However, the White House Council of Economic Advisers believe that the current spike in the Consumer Price Index (CPI) which measures the rate of inflation is due to the "base effect" of rising from very low inflation in 2020 caused by the pandemic. Therefore, the hike in the inflation rate is a transitory surge. 

But Mohammed El-Erian, a Bloomberg opinion columnist and President of Queens' College, Cambridge, however, argues that this round of inflation is not transitory but should be taken seriously and urges the Federal Reserve to move quickly before an inflation problem  becomes a growth problem. David Brooks of the New York Times told Judy Woodruff of PBS NewsHour that "The worrying thing for me is the inflation rate, the inflation rate is much higher than many economists said. …if you have wages going up as fast as they are, then that leads to long-term inflation".

Larry Summers, the former US Treasury Secretary  also argues that the government's fiscal stimulus will create demand far beyond the economy's present output capacity, risking persistent inflation.

In fact, the third US fiscal stimulus package of US$1.9 trillion ( about 9 per cent of US GDP)  has coincided with the current rising inflation expectation in the US. The EU also has rolled out a sizeable stimulus package of US$2.2 trillion (about 12 per cent of EU GDP).

Developing countries like Bangladesh are also facing rising inflationary pressures due to rising energy prices and supply chain disruptions. The IMF projection for inflation for Bangladesh stands at 5.70 per cent for this year. According to the BBS, Bangladesh recorded an inflation rate of 5.50 percent between October 2020 and Sepember 2021 ( FE, October 22).

The IMF report also emphasised that central banks should act to curb inflation - and by implication to push for higher wages through tightening of monetary policy. The report further added, "A spiral of doubt could hold back private investment and lead to precisely the slower employment recovery central banks seek to avoid when holding off on  tightening".

The IMF also cut its forecasts for the US and other major industrial economies. The growth estimate for the US is cut by 1 percentage point to 6 per cent, and for Germany  is reduced by 0.5 percentage point  to 3.1 per cent while Japan's growth is lowered 0.4 point to 2.4 per cent. China's 2021 growth forecast is trimmed by 0.1 point to 8 per cent.

The growth forecast for Bangladesh is projected at 6.5 per cent for 2021. While India's growth forecast remains unchanged at 9.5 per cent for this year, but prospects in other emerging Asian economies have been slashed due to  the worsening of the pandemic. It is to be noted that according to the IMF Bangladesh's per capita income this year is estimated at US$2,139 which is higher than that of India by US$23.00.

In a blog post,  IMF Chief Economist Gita Gopinath said that the global lender is getting more concerned about persistent inflation. "Monetary policy" Gopinath commented, "will need to walk a fine line between tackling inflation and financial risks and supporting the economic recovery". She then added, "While monetary policy can generally look through transitory increases in inflation, central banks should  be prepared  to act quickly if the risks of rising inflation expectations become more material in this uncharted economic recovery".

"The dangerous divergence in economic prospects across countries" the IMF said, "remains a major concern".  It attributed this economic divergence to the sizeable disparities in vaccine access between wealthy and low income countries. While almost 60 per cent of the population in advanced economies are fully vaccinated, only about 4 per cent of population in the poorer countries are. The outlook for poorer countries had "darkened considerably" due to the surge in cases of the delta variant that has raised death toll worldwide, it further added.

Gopinath highlighted the importance of equitable access to  vaccine for every country to secure better economic future for all. But till now, there is no indication that it is happening. She then added, "Recent developments have made it abundantly clear that we are all in this together and the pandemic is not over anywhere until it is over everywhere".

Kristalina Georgieva, the IMF Managing Director also agrees that the most serious obstacle to a full recovery is the vaccine divide between rich and poor nations. She further  warned that global economy could suffer a cumulative US$5.3 trillion loss over the next five years unless it (vaccine divide) was closed.

She further emphasised that " In addition to vaccines, we must also close a US$20 billion gap in grant financing for testing, tracing and therapeutics. If we do not, large part of the world will remain unvaccinated and the human tragedy will continue".

However, it is very interesting to note that the new World Economic Outlook Report was released only hours after IMF expressed confidence in its managing director, Kristalina Georgieva, in response to allegations that while serving as a senior World Bank Official, she and others pressured staffers to change business ranking to placate China.

In fact, as the virtual gathering of the IMF-WB meeting was due to commence,  a real prospect of  the IMF's head Georgieva being removed from her position became a strong possibility. She was under investigation by the IMF executive board for alleged manipulation of data to lift China's rating in the World Bank's 2018 Ease of Doing Business Report.

After a series of eight meetings stretching over almost 26 days, the 24-member IMF executive board decided that she could keep her job as the evidence presented "did not conclusively demonstrate" that Georgieva "played an improper role".

Georgieva rejected the allegations and support for her came from people like Joseph Stiglitz and  Nicholas Stern, both former World Bank Chief Economists  and Jefferey Sachs who even said that she had been targeted because she was "not a sworn enemy of Beijing".  Stiglitz described the investigation as a "hatchet" job.

She also received support from European countries and France in particular took a leading role in it along with Germany.  Georgieva was an EU Commissioner before moving to Washington. The US (the largest shareholder of IMF) in a bid to avert another conflict with Europe decided to back down, at least for the moment.

However, US Treasury Secretary Janet Yellen effectively put Georgieva on notice and said the US Treasury would "monitor, follow up closely, evaluate any new facts or findings".

The issue is not about a few points this way or that way in the business report but about rising economic power of China leading to its increased role in multilateral institutions including the IMF and the WB. The political establishment in the US is now determined to forestall China's ability to increase its influence corresponding with its rising economic power in multilateral institutions like the IMF or any other such institutions.

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