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Legacy Capital / Marketing Materials / Analytical info / The economy is recovering, and uncertainty is growing

The economy is recovering, and uncertainty is growing

The economy is recovering, and uncertainty is growing
Date: 25.10.2021

Despite a new wave of the pandemic, the global economy continues to recover. At the same time, the country’s development disparities resulting from the spread of COVID-19 will have a long-term impact on medium-term economic performance.

These are the main conclusions of the report of the International Monetary Fund "Prospects for the development of the world economy" published in October.

The rapid spread of the delta strain and the threat of new variants has increased uncertainty about how quickly the pandemic can be overcome. Policy choices have been made more difficult by serious challenges across a range of areas—slow job growth, rising inflation, food insecurity, delays in human capital formation, and climate change—with limited room to maneuver.

Forecast

The global economy is projected to grow at 5.9 percent in 2021 and 4.9 percent in 2022 (0.1 percentage point lower in 2021 than projected in the July 2021 World Economic Outlook Update).

The downward revision to the 2021 outlook reflects a lower outlook for advanced economies (due in part to supply disruptions) and low-income developing countries, mainly due to the worsening course of the pandemic.

This is partly offset by improved short-term prospects for some emerging market and developing commodity exporters. Employment growth is expected to lag broadly behind the recovery production volumes.


After 2022, global economic growth is projected to slow to around 3.3 percent over the medium term. Output in advanced economies is projected to exceed medium-term pre-pandemic projections, largely due to further strong support expected in the United States, including measures to build the capacity of the economy.

In contrast, the group of emerging market and developing countries is projected to experience long-term declines in production as a result of slower vaccination rollouts and generally less policy support than advanced economies.

Headline inflation rates are rising rapidly in the US and some emerging market and developing economies. In most cases, rising inflation reflects pandemic-driven mismatches between supply and demand and higher commodity prices relative to from a low base a year earlier.

In some emerging market and developing economies, price pressures are projected to continue due to higher food prices, the lagged effects of rising oil prices, and rising import prices due to depreciation.

However, the outlook for inflation is highly uncertain, primarily due to the evolution of the pandemic, the duration of supply disruptions and possible dynamics of inflationary expectations in these conditions.

In general, risks of lower growth rates prevail. Of greatest concern is the possibility of more aggressive strains of SARS-CoV-2 emerging before the widespread population vaccination is achieved.

Fiscal policy

The necessary measures will depend on the stage of the pandemic. Health spending remains the top priority. As the pandemic continues and fiscal space is limited in some countries, it will be necessary to better target support and transfers to those most affected and provide retraining and transition assistance to other sectors.

Monetary policy

While central banks can largely remain unresponsive to temporary inflationary pressures and avoid tightening policy until underlying price action becomes clearer, they should be prepared to act quickly if the economic recovery picks up faster than expected or if inflation risks rise. Expectations become more tangible. In cases where inflation is picking up at still-weak employment levels and the risks of loosening inflation expectations are concrete, it may be necessary to tighten monetary policy in anticipation of price pressures, even if this delays the employment recovery.

Preparing for the post-pandemic economy

Finally, it is also important to pay attention to addressing the challenges inherent in the post-pandemic economy: closing the human capital gap caused by the pandemic, helping to create new growth opportunities associated with green technologies and digitalization, reducing inequalities and ensuring sustainability of public finances.

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