Vaccine ‘fault lines’ send IMF forecasts in different directions

The International Monetary Fund (IMF) has raised its 2021 growth forecasts for advanced economies but cut its outlook for emerging and developing countries amid a divergence in Covid-19 vaccination rates.

“Vaccine access has emerged as the principal fault line along which the global recovery splits into two blocs: those that can look forward to further normalisation of activity later this year (almost all advanced economies) and those that will still face resurgent infections and rising Covid death tolls,” the IMF said in its latest quarterly world economic outlook report.

However, the Washington-based fund warned that an overall recovery is not assured even in countries where infections are currently very low as long as the virus circulates elsewhere.

While the IMF’s 2021 global gross domestic product (GDP) growth forecast remains unchanged at 6 per cent, from its last report in April, it has increased its projection for advanced economies by 0.5 of a percentage point and has lowered its outlook for emerging and developing economies by 0.4 of a point.

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It has raised its euro zone forecast by 0.2 of a point to 4.6 per cent. Global output contracted by 3.2 per cent last year.

The fund has upgraded its global estimate for 2022 by half a point to 4.9 per cent, driven by anticipated additional US economic stimulus in the second half of this year.

Almost 40 per cent of the population of advanced economies has been fully vaccinated, compared to only about 10 per cent across emerging markets and a “tiny fraction in low-income countries”, according to the IMF.

“Sub-Saharan Africa is now in the grip of a third wave, parts of Latin America continue to see high levels of new deaths, and concerns still remain about the situation in parts of south and southeast Asia,” it said.

The European Commission said on Tuesday that 70 per cent of adults in the EU have received at least one shot of a vaccine. While most European countries have seen a surge in new cases in recent weeks as the Delta variant spreads, hospitalisations and deaths have remained well below peaks observed over the winter.

Inflation

The IMF said that risks to the global forecasts remain to the downside as a slower-than-anticipated vaccine rollout would allow the virus to mutate further. Another hit could come from central banks in advanced economies scaling back stimulus if inflation expectations rise more rapidly than expected, it said.

The IMF said it believes, however, that a recent spike in consumer prices internationally is just a result of temporary supply-demand mismatches as the economies reopen at varying paces from pandemic restrictions.

“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,” it said.

“Elevated inflation is also expected in some emerging markets and developing economies, related in part to high food prices. Central banks should generally look through transitory inflation pressures and avoid tightening until there is more clarity on underlying price dynamics.”

The European Central Bank (ECB) moved last Thursday to push expectations of a rate rise well into the future as it signalled it will let inflation run hot to make sure it reaches its target of 2 per cent. That inflation goal is unlikely to be reached for at least two years, according to the ECB's own estimates, and economists now forecast that it could be 2024 or 2025 before rates rise again.