Outlook for the global economy. June 2021. IMF report

Access to vaccination on a distribution scale has become a major gap, along which the global recovery is divided into two clusters: countries that allow economic activity to normalize towards the end of the year (almost all advanced economies), and countries that continue to cover with increased bursts infections and high death rates from COVID-19. However, as long as the spread of the virus continues anywhere, there is no guarantee of an upsurge, even in countries with very low rates of disease at the moment.

These are the main conclusions of the International Monetary Fund's recently published July World Economic Outlook (WEO) report.

Since the release of the April outlook, there has been a further increase in divergence in the economic outlook.

IMF experts predict that growth in the global economy will be 6.0 percent in 2021 and 4.9 percent in 2022.

The global outlook for 2021 remains unchanged from the April 2021 WEO outlook, but there are offsetting changes.

The outlook for the emerging market and developing economies for 2021 is revised down, especially for emerging Asia. In contrast, the outlook for advanced economies is up. These revisions reflect the dynamics of the pandemic and changes in policy support.

The 0.5 percentage point improvement in the 2022 outlook is mainly due to a more favorable outlook for advanced economies, especially the US, due to expected additional fiscal support legislation in the second half of 2021 and improved health outcomes in this group of countries.

Inflation is expected to return to its pre-pandemic range in 2022 in most countries, when the impact of these disequilibria on prices ends, although there remains high uncertainty in this regard.

Higher inflation is also expected in some emerging market and developing economies, partly due to high food prices.

The baseline risks for the world as a whole point to the possibility of a worsening situation.

A slower than expected rollout of vaccination will set the stage for further virus mutations. Financial conditions could quickly become tighter, for example, due to a reassessment of the monetary policy outlook in advanced economies if inflation expectations rise faster than expected.

A double whammy to the emerging market and developing economies because of the worsening dynamics of the pandemic and tightening external financial conditions will have a strong negative impact on the economic recovery in these countries and send global growth below the base case for this forecast.

Factors Determining Prospects

Vaccinations

In advanced economies, almost 40 percent of the population is fully vaccinated, while in emerging market countries the share of those vaccinated is less than half of this level, and in low-income countries the rate is many times lower.

Access to vaccines has become a major gap that divides the global recovery into two blocs: countries that can look forward to a normalization of economic activity towards the end of the year (almost all advanced economies), and countries that continue to face new surges in infections and an increase in the number of deaths from COVID-19. Sub-Saharan Africa is currently in the grip of a third wave, parts of Latin America continue to report high levels of new deaths, and concerns remain about the situation in parts of South and South-East Asia.

Policy support

The continuing impact of large budget allocations in the US and new measures in other advanced economies (including France, Germany, Italy, Korea, and the United Kingdom) contributes to the further divergence of trajectories.

On the other hand, many emerging and developing economies are seeking to rebuild fiscal buffers. Some countries, including Brazil, Hungary, Mexico, Russia and Turkey, have also begun to normalize monetary policy to contain upward pressure on prices.

Mixed economic recovery driven by new strains of the virus, impact of shocks and imbalances between supply and demand

The results of the first quarter GDP were generally higher than expected, specially in Asia and Latin America, while the resumption of lockdown measures in Europe resulted in lower-than-expected GDP numbers.

High-frequency data for the second quarter indicate that the economic recovery is expanding beyond manufacturing to the service sector, especially in countries where the incidence is more under control.

New Strains

A sustained recovery is not guaranteed anywhere as long as certain segments of the population remain exposed to the virus and its mutations. Economic recovery is being severely hampered in countries hit by new waves of disease, especially in India. In the United Kingdom, the last phase of the lifting of economic restrictions due to the spread of the delta strain had to be postponed, although the rollout of vaccines helped to reduce the number of hospitalizations.

After many months of minimal new infections, China's Guangdong province imposed travel restrictions in May following an outbreak. Australia also reintroduced targeted self-isolation measures in June.

Consequences of shocks 

The unprecedented upheavals in the global economy over the past years continue to have repercussions that are hurting the economic recovery in some parts of the world. Empty shipping containers have settled in less active ports, while there are shortages in more dynamic destinations, contributing to the longer delivery times for inputs noted in purchasing managers' surveys.

Imbalances between supply and demand

With shifts in spending patterns, for example towards housing and electronics for work at home, there have been shortfalls that are temporal. As a result of the pandemic-driven demand for owner-occupied housing (which in some cases is for mortgages), house prices are rising in countries that had lower homeownership rates before the pandemic. These shifts in spending patterns and supply disruptions have resulted in shortages of components such as microchips, which are creating bottlenecks in the automotive sector, for example.

Inflationary pressure

The current spikes in annual inflation are partly due to the mechanical effects of base changes, given last year's low commodity prices. In addition, prices have risen due to the probably temporary mismatches between supply and demand discussed above. For example, since mid-2020, the indices for the freight of shipping containers have increased significantly.

The divergent trajectories of economic recovery are expected to continue through 2022.