As supply disruptions linger, IMF cuts global growth outlook

The revision comes as the post-pandemic recovery in advanced economies, including the U.S. and Germany, is losing steam.

The global recovery from the COVID-19 pandemic has lost some of its steam, the International Monetary Fund (IMF) said in its latest update of the World Economic Outlook released on October 12. The world economy is now projected to grow 5.9 per cent this year, down 0.1 percentage point from IMF's July forecast, as major economies such as the U.S. and Germany reel from supply chain bottlenecks. The downgrade also reflects dim prospects in low-income developing countries, where a slow rollout of COVID-19 vaccines continues to weigh on the recovery.

Shipping snarls, a shortage of shipping containers and a steep rebound in demand as pandemic-related restrictions are relaxed have left producers in advanced economies scampering for components and raw materials. Industrial production in Germany witnessed its steepest drop in August since April last year, driven by a 17.5 per cent slump in production of cars and auto partsdue to supply chain disruptions.

"Pandemic outbreaks in critical links of global supply chains have resulted in longer than expected supply disruptions, feeding inflation in many countries," IMF Chief Economist Gita Gopinath said. "Overall, risks to economic prospects have increased and policy trade-offs have become more complex."

Diverging fortunes

The IMF kept its growth forecast for 2022 unchanged at 4.9 per cent but stuck to its warning of uneven global recovery. Only the developed economies are expected to return to their pre-pandemic output growth path by next year. By comparison, total output in emerging and developing economies, excluding China, is expected to remain 5.5 per cent below the pre-pandemic forecast even in 2024, dealing a blow to improvements in living standards in those countries. The poorest countries are expected to lag even further behind.

The gap in recovery speeds can be partially explained by massive differences in fiscal and monetary response. While advanced economies pumped in trillions of dollars into their economies to deal with the economic fallout of the pandemic, the others didn't have enough policy space, taking the brunt of the hit to the global output as a result.

The schism in policy support is likely to continue with major advanced economy central banks expected to keep their money taps wide open through late next year and some emerging market central banks, including in Brazil and Russia, already scaling back support. "The dangerous divergence in economic prospects across countries remains a major concern," Gopinath said.

'Great vaccine divide'

Gopinath said the divergences were also a result of the "great vaccine divide," adding that while over 60 per cent of the population in advanced economies have been fully vaccinated, about 96 per cent of the population in low-income countries remain unvaccinated. The IMF chief economist said the top policy priority should be to ensure that 40 per cent of the population in every country is fully vaccinated by this year and 70 per cent by mid-2022.

"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," she said. "If COVID-19 were to have a prolonged impact — into the medium-term — it could reduce global GDP by a cumulative $5.3 trillion (€4.6 trillion) over the next five years relative to our current projection."