The ongoing global recovery faces several challenges as the pandemic enters its third year. The rapid spread of the Omicron variant has led to renewed restrictions on mobility and an increased shortage of workers in many countries.
Supply disruptions continue to weigh on economic activity and contribute to higher inflation, compounding pressure from strong demand and elevated food and energy prices. In addition, record levels of debt and rising inflation are limiting many countries’ ability to weather renewed disruption.
However, some challenges might be of shorter duration than others. The new variant appears to be associated with less severe disease than the delta variant, and the record spike in infections is expected to decline relatively quickly.
The latest World Economic Outlook from the IMF therefore assumes that while Omicron will weigh on activity in the first quarter of 2022, this effect will start to wear off from the second quarter.
Other challenges and policy pivots are expected to have a greater impact on the outlook. We forecast global growth of 4.4 percent this year, down 0.5 percentage points from previously forecast, mainly due to downgrades for the United States and China.
In the case of the United States, this reflects reduced prospects for passage of the Build Back Better tax package, an earlier rollback of extraordinary monetary accommodation, and ongoing supply disruptions.
China’s downgrade reflects continued contraction in the property sector and a weaker-than-expected recovery in private consumption. Delivery interruptions have also led to discounts for other countries such as Germany.
We expect global growth to slow to 3.8 percent in 2023. This is 0.2 percentage points higher than the October 2021 WEO and broadly reflects a recovery after the current brakes on growth have eased.
We have revised upwards our inflation forecasts for 2022 for both advanced and emerging and developing markets, with expectations that elevated price pressures will persist for longer. Supply-demand imbalances are expected to narrow throughout 2022 based on industry expectations of improved supply as demand gradually rebalances from goods to services and extraordinary policy support is withdrawn.
In addition, according to futures markets, energy and food prices are likely to rise at more moderate rates in 2022. Therefore, assuming that inflation expectations remain anchored, inflation is expected to moderate in 2023. Even if the recovery continues, worrying disparities in prospects between countries persist. While advanced economies are expected to return to pre-pandemic trends this year, several emerging and developing economies are expected to experience significant output contractions over the medium term.
The number of people living in extreme poverty was estimated to be around 70 million above pre-pandemic trends in 2021, setting back progress on poverty reduction by several years.
The forecast is subject to a high degree of uncertainty and the risks are pointing downwards overall. The emergence of deadlier variants could prolong the crisis.
China’s zero-Covid strategy could exacerbate global supply disruptions, and if the financial strain in the country’s real estate sector spreads to the economy in general, the impact would be widespread.
Higher inflation surprises in the United States could prompt aggressive monetary tightening by the Federal Reserve and severely tighten global financial conditions. Rising geopolitical tensions and social unrest also pose risks to the outlook.
Breaking the hold of the pandemic is crucial to addressing many of the difficulties facing the global economy.
Global Efforts
Breaking the hold of the pandemic is crucial to addressing many of the difficulties facing the global economy. This requires a global effort to ensure widespread vaccination, testing and access to therapeutics, including newly developed antiviral drugs.
Currently, only 4 percent of the population in low-income countries is fully vaccinated, compared to 70 percent in high-income countries. In addition to ensuring a predictable supply of vaccines for low-income developing countries, support should be provided to increase absorption capacity and improve health infrastructure.
There is an urgent need to close the $23.4 billion funding gap for the Access to Covid-19 Tools (ACT) Accelerator and incentivize technology transfers to diversify global production of critical medical tools, particularly in Africa, to speed up.
At the national level, policy should continue to be tailored to country-specific circumstances, including the extent of the recovery, underlying inflationary pressures and the policy space available.
Both fiscal and monetary policy must work together to achieve economic goals. Given the high level of uncertainty, policymakers must also remain agile and adapt to incoming economic data.
With policy space constrained in many economies and strong recovery underway in others, fiscal deficits are expected to narrow in most countries this year.
The budget priority should remain the health sector and transfers should be effectively targeted where necessary to those most affected.
All initiatives must be embedded in a medium-term fiscal framework that provides a credible path to ensure that public debt remains sustainable.
Monetary policy is at a critical juncture in most countries. Where inflation is broad-based alongside a strong recovery, as in the United States, or high inflation is at risk of becoming entrenched, as in some emerging, developing and advanced economies, extraordinary monetary policy support should be withdrawn.
Several central banks have already started raising interest rates to forestall price pressures. It is crucial to communicate the policy transition to a tighter stance well to ensure an orderly market response.
Where core inflationary pressures remain subdued and the recovery remains incomplete, monetary policy can remain accommodative.
As monetary policy tightens across the board this year, economies will need to adjust to a higher interest rate environment globally. Emerging and developing countries with large foreign currency borrowing and external financing needs should prepare for potential financial turmoil by extending debt maturities as much as possible and curbing currency mismatches.
Exchange rate flexibility can help with the necessary macroeconomic adjustment. In some cases, foreign exchange intervention and temporary measures to control capital flows may be necessary to give monetary policy the leeway to focus on domestic conditions.
As interest rates rise, low-income countries, 60 percent of which are already in a debt crisis or at high risk of a debt crisis, are finding it increasingly difficult to service their debt.
The G20 Common Framework needs to be revised to accelerate results on the debt restructuring, and G20 and private creditors should suspend debt servicing while the restructuring is negotiated.
As the pandemic enters its third year, the global death toll has risen to 5.5 million deaths, and the associated economic losses are expected to total nearly $13.8 trillion by 2024, compared to pre-pandemic projections .
These numbers would have been far worse were it not for the extraordinary work of scientists, the medical community, and the swift and aggressive policy responses around the world.
However, there is still work to be done to ensure losses are contained and to narrow the wide disparities in recovery prospects across countries. Policy initiatives are needed to reverse the large learning losses suffered by children, particularly in developing countries. On average, students in middle- and low-income countries had 93 days more nationwide school closures than students in high-income countries.
On climate, a bigger push is needed to reach net-zero carbon emissions by 2050, with carbon pricing mechanisms, green infrastructure investments, research subsidies and funding initiatives to enable all countries to invest in mitigation and adaptation actions.
The last two years confirm once again that this crisis and the ongoing recovery is like no other. Policymakers must closely monitor a wide range of incoming economic data, prepare for contingencies and be ready to communicate and implement policy changes at short notice.
In parallel, bold and effective international cooperation should ensure that the world escapes the grip of the pandemic this year.
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