By Nathalie Voit

The International Monetary Fund (IMF) revised its 2021 global growth forecast downward amid persistent inflation, widespread supply-demand mismatches, and deteriorating pandemic dynamics. The group slashed growth prospects for the global economic recovery from 6.0% in its July report to 5.9%.

In its latest World Economic Outlook report, released Oct. 12, the IMF cited supply-chain disruptions in advanced economies and warned of rising inflation risks. In turn, the outlook improved for emerging markets and developing economies due to stronger near-term prospects among some commodity-exporting nations.

“Pandemic outbreaks in critical links of global supply chains have resulted in longer-than-expected supply disruptions, further feeding inflation in many countries. Overall, risks to economic prospects have increased, and policy trade-offs have become more complex,” Gita Gopinath, the IMF’s chief economist, wrote in a foreword to the report.

The IMF trimmed its economic forecast for the U.S. to 6% from the 7% estimate projected in July due to softening consumption in the third quarter and declining inventory reflecting supply disruptions. In Germany, shortages of critical inputs contributed to dampened manufacturing capacity, cutting projected growth to 3.1% from 3.6% over the summer. Meanwhile, stringent lockdown mandates lowered growth prospects from 2.8% in July to 2.4% in Japan. Similarly, growth prospects in China for the year were trimmed back due to an unanticipated reduction in public investment.

On the other hand, the economic outlook for low-income countries slightly improved from 6.3% in July to 6.4%. Although the slow vaccine rollout in developing countries continued to weigh in on the recovery, the bleak forecasts were offset by major gains among some commodity exporters. Energy-rich countries like Russia, Chile, and Peru stand to benefit from rising oil, natural gas, and metals prices. Nonetheless, soaring food and commodity prices, in conjunction with the spread of the delta variant and lagging international vaccination efforts, threaten to divert the economic recovery for poorer nations.

“The dangerous divergence in economic prospects across countries remains a major concern… While almost 60 percent of the population in advanced economies are fully vaccinated, and some are now receiving booster shots, about 96 percent of the population in low-income countries remain unvaccinated,” Gopinath wrote.

The 190-member group alerted policymakers about the possible need for swift action should inflation throw the world’s economic recovery off track. While the IMF projects that inflation will retreat to pre-pandemic levels by mid-2022, the group warns the inflation outlook is “highly uncertain,” depending in large part on an ample labor supply to contain an unforgiving wage-price spiral.

“Should households, businesses, and investors begin anticipating that price pressures from pent-up demand and the many factors outlined above will persist, there is a risk that medium-term inflation expectations could drift upward and lead to a self-fulfilling further rise in prices,” IMF economists noted. For now, “there are no signs of such a shift,” they added.

The group expects global economic growth to subside to 4.9% in 2022 and then to moderate to 3.3% over the medium term.