A disrupted global recovery | MENAFN.COM
(MENAFN-Caribbean News Global)
By Gita Gopinath
The continued global recovery faces multiple challenges as the pandemic enters its third year. The rapid spread of the Omicron variant led to further mobility restrictions in many countries and increased labor shortages. Supply disruptions are still weighing on activity and contributing to higher inflation, adding to pressures from strong demand and rising food and energy prices. In addition, record debt and rising inflation are limiting the ability of many countries to weather further disruptions.
Some challenges, however, might be shorter in duration than others. The new variant appears to be associated with less severe disease than the Delta variant, and the record increase in infections is expected to decline relatively quickly. The IMF’s latest World Economic Outlook therefore anticipates that while Omicron will weigh on activity in the first quarter of 2022, this effect will fade from the second quarter.
Other political challenges and pivots are expected to have a greater impact on the outlook. We forecast global growth of 4.4% this year, 0.5 percentage point lower than expected, mainly due to downward revisions in the United States and China. In the case of the US, this reflects weaker prospects to legislate the Build Back Better fiscal package, an earlier withdrawal of extraordinary monetary easing and continued supply disruptions. China’s downgrade reflects the continued decline in the real estate sector and a weaker-than-expected recovery in private consumption. Supply disruptions also led to markdowns for other countries, such as Germany. We expect global growth to slow to 3.8% in 2023. This is 0.2 percentage point higher than in the October 2021 WEO and largely reflects a recovery after the current headwinds have dissipated. to growth.
We have revised our 2022 inflation forecast upwards for advanced, emerging and developing economies as elevated price pressures are expected to persist for longer. Supply and demand imbalances are expected to decrease in 2022 based on industry expectations for improved supply as demand gradually rebalances from goods to services and policy support extraordinary is withdrawn. Additionally, energy and food prices are expected to rise at more moderate rates in 2022 according to futures markets. Assuming that inflation expectations remain anchored, inflation should therefore decline in 2023.
Even as the recoveries continue, the troubling divergence in outlook between countries persists. While advanced economies are expected to return to the pre-pandemic trend this year, several emerging markets and developing economies are expected to experience significant output losses over the medium term. The number of people living in extreme poverty is estimated to have been around 70 million higher than pre-pandemic trends in 2021, setting back progress on poverty reduction by several years.
The forecasts are subject to high uncertainty and the risks are generally tilted to the downside. The emergence of more lethal variants could prolong the crisis. China’s zero-COVID strategy could exacerbate global supply disruptions, and if financial strains in the country’s property sector spill over to the wider economy, the ramifications would be widely felt. Higher inflation surprises in the United States could lead to aggressive monetary tightening by the Federal Reserve and significantly tighten global financial conditions. Rising geopolitical tensions and social unrest also pose risks to the outlook.
To deal with many of the challenges facing the global economy, it is essential to break the grip of the pandemic. This will require a global effort to ensure widespread vaccination, testing and access to treatments, including newly developed antiviral drugs. Currently, only 4% of the population in low-income countries are fully immunized compared to 70% in high-income countries. In addition to ensuring a predictable supply of vaccines for low-income developing countries, assistance should be provided to build absorptive 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 encourage technology transfers to help accelerate the diversification of global food production. essential medical tools, especially in Africa.
At the national level, policies should remain tailored to the specific circumstances of the country, including the magnitude of the recovery, the underlying inflationary pressures and the policy space available. Fiscal and monetary policies will need to work in tandem to achieve economic goals. Given the high level of uncertainty, policies must also remain nimble and adapt to incoming economic data.
With tight policy space in many economies and strong recoveries underway in others, fiscal deficits in most countries are expected to narrow this year. The budgetary priority must remain the health sector and transfers, if any, must be effectively targeted to those most affected. All initiatives will need to be embedded in medium-term fiscal frameworks that chart a credible path to ensure that public debt remains sustainable.
Monetary policy is at a critical juncture in most countries. When inflation is broad-based alongside a strong recovery, as in the United States, or when high inflation is likely to take hold, as in some emerging markets, developing and advanced economies, extraordinary monetary policy support must be removed. Several central banks have already started raising interest rates to forestall price pressures. Properly communicating the political transition to hardening is essential to ensure an orderly market reaction. Where underlying inflationary pressures remain subdued and recoveries incomplete, monetary policy can remain accommodative.
As the monetary policy stance tightens more broadly this year, economies will have to adjust to a global environment of higher interest rates. Emerging and developing economies with large foreign currency borrowing and external financing needs should prepare for possible financial market turbulence by extending debt maturities as much as possible and controlling currency mismatches . Exchange rate flexibility can contribute to the necessary macroeconomic adjustment. In some cases, foreign exchange interventions and temporary capital flow management measures may be needed to give monetary policy the leeway to focus on domestic conditions.
With rising interest rates, low-income countries, 60% of which are already in debt distress or at high risk of debt distress, will find it increasingly difficult to service their debt. The common G20 framework must be revamped to accelerate debt restructuring, and G20 creditors and private creditors should suspend debt service while restructurings are being negotiated.
At the start of the third year of the pandemic, the global death toll has risen to 5.5 million deaths and the accompanying economic losses are expected to approach $13.8 trillion through 2024 compared to pre-pandemic forecasts. These numbers would have been much worse without the extraordinary work of scientists, the medical community and the swift and aggressive political responses around the world.
However, much more needs to be done to ensure that the losses are contained and to reduce the wide disparities in recovery prospects between countries. Policy initiatives are needed to reverse the significant learning losses experienced by children, especially in developing countries. On average, students in middle- and low-income countries have had 93 more days of nationwide school closures than those in high-income countries. On climate, a greater effort is needed to achieve net zero carbon emissions by 2050, with carbon pricing mechanisms, investments in green infrastructure, research grants and climate change initiatives. funding so that all countries can invest in climate change mitigation and adaptation measures.
The past two years confirm that this crisis and the ongoing recovery are unlike any other. Policymakers must vigilantly monitor a wide range of incoming economic data, prepare for contingencies, and be ready to communicate and execute near-term policy changes. At the same time, bold and effective international cooperation should ensure that this year is the year the world escapes the grip of the pandemic.
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