The International Monetary Fund maintained its 6 percent global growth forecast for 2021 on Tuesday, raising expectations for the United States and other wealthy economies while lowering projections for a number of developing countries grappling with rising COVID-19 infections.
The disparity is largely due to improved access to COVID-19 vaccines and continued fiscal support in advanced economies, while emerging markets face challenges on both fronts, according to the IMF in an update to its World Economic Outlook.
“Nearly 40% of the population in advanced economies has been fully vaccinated, compared to 11% in emerging market economies and a tiny fraction in low-income developing countries,” said Gita Gopinath, the IMF’s chief economist, in a statement accompanying the report.
“Faster-than-expected vaccination rates and a return to normalcy have resulted in upgrades, while lack of access to vaccines and resurgences of COVID-19 cases in some countries, particularly India, have resulted in downgrades,” she explained.
The IMF significantly increased its forecasts for the United States, which it now expects to grow at 7.0 percent in 2021 and 4.9 percent in 2022 – an increase of 0.6 and 1.4 percentage points, respectively, from the forecasts in April. The projections are based on the assumption that the United States Congress will approve President Joe Biden’s proposed $4 trillion in infrastructure, education, and family support spending, largely as envisioned by the White House.
Positive spillovers from the United States’ spending plans, combined with expected progress in COVID-19 vaccination rates, have raised the IMF’s 2022 global growth forecast to 4.9 percent, up 0.5 percentage point from April.
The Fund reduced India’s 2021 growth forecast by three percentage points to 9.5 percent, citing the country’s struggle with a massive wave of infections this year. It also cut its forecast for China for 2021 by 0.3 percentage point, citing a reduction in public investment and overall fiscal support.
The IMF also forecasts lower prospects for Indonesia, Malaysia, the Philippines, Thailand, and Vietnam, where recent COVID-19 infections have slowed activity. The Fund forecasted 7.5 percent growth in emerging Asia this year, down 1.1 percentage points from its April forecast.
The Fund reduced low-income countries’ growth projections by 0.4 percentage point for 2021, citing the slow rollout of vaccines as the main impediment to their recovery.
According to the IMF, global downside risks remain significant, including the possibility of new, highly contagious coronavirus variants leading to new restrictions on movement and reduced economic activity. The Fund estimates that in one scenario affecting both emerging markets and advanced countries with high vaccine hesitancy, global GDP growth could be reduced by 0.8 percentage point this year and in 2022.
According to the IMF, inflationary pressures are a temporary result of “supply-demand mismatches” as economies reopen, with inflation expected to return to pre-pandemic levels in most countries by 2022. However, it warned that persistently high inflation readings could prompt the Federal Reserve and other advanced-country central banks to “reassess” their monetary policy outlook.
Pre-emptive action by these central banks would be a “double whammy” for emerging markets, adding capital outflows and tighter financial conditions to their growth challenges.
Another significant downside risk, according to the IMF, is the possibility of U.S. infrastructure and social spending plans being scaled back due to deep divisions in Congress between Democrats and Republicans. According to the IMF, the proposed spending would increase US growth by 0.3 percentage point in 2021 and 1.1 percentage point in 2022.
The Fund’s policy prescriptions for countries remained largely unchanged: prioritize health spending, particularly for vaccinations, assist vulnerable households and businesses, and invest in education, training, and productivity-boosting projects, as well as accelerate the transition to a low-carbon economy.