IMF raises growth forecasts for rich nations, dims outlook for developing world

The divergence is based largely on better access to COVID-19 vaccines and continued fiscal support in advanced economies, while emerging markets face difficulties on both fronts, the IMF said in an update to its World Economic Outlook.

"Close to 40 percent of the population in advanced economies has been fully vaccinated, compared with 11 percent in emerging market economies, and a tiny fraction in low-income developing countries," Gita Gopinath, the IMF's chief economist, said during a news conference.

"Faster-than-expected vaccination rates and return to normalcy have led to upgrades, while lack of access to vaccines and renewed waves of COVID-19 cases in some countries, notably India, have led to downgrades," she said.

The IMF significantly raised its forecasts for the United States, which it now expects to grow at 7.0 percent in 2021 and 4.9 percent in 2022 – up 0.6 and 1.4 percentage points, respectively, from the forecasts in April. The projections assume the U.S. Congress will approve President Joe Biden's roughly $4 trillion in proposed infrastructure, education and family support spending largely as envisioned by the White House.

Positive spillovers from the U.S. spending plans, along with expected progress in COVID-19 vaccination rates, are boosting the IMF's 2022 global growth forecast to 4.9 percent, up 0.5 percentage points from April.

The Fund gave its biggest upgrade to Britain, lifting its 2021 growth by 1.7 percentage points to 7.0 percent, reflecting better adaptation to COVID-19 restrictions than previously anticipated. The euro zone saw a smaller 0.2 percentage point upgrade for 2021, while Japan saw a 0.5 percentage point cut, reflecting higher infections and tighter restrictions in the first half of the year.

India, which has struggled with a massive wave of coronavirus infections this year, saw the biggest cut in its growth forecast - three percentage points - to 9.5 percent for 2021. The IMF also reduced its 2021 forecast for China by 0.3 percentage point, citing a scaling back of public investment and overall fiscal support.

The IMF also forecast lower prospects for Indonesia, Malaysia, the Philippines, Thailand and Vietnam where recent waves of COVID-19 infections are weighing on activity. The Fund forecast that emerging Asia would grow 7.5 percent this year, down 1.1 percentage points from the April forecast.

Low-income countries saw a downgrade of 0.4 percentage point in their 2021 growth, with the Fund citing the slow rollout of vaccines as the main factor impeding their recovery.

INFLATION WATCH

Gopinath said the IMF views inflation pressures as transitory due to "supply-demand mismatches" as economies reopen, with high inflation readings this year, especially in the United States, returning to normal levels next year.

But she said that if supply bottlenecks proved long-lasting, they could cause inflation expectations to become unanchored next year, which would be a concern.

"While we are seeing wages going up for some sectors, we are not seeing that as a broad-based phenomenon and inflation expectations are anchored," she said. "However, we still aren't out of the woods yet."

If the Federal Reserve reassesses its inflation outlook and takes pre-emptive action to tighten monetary policy, this would add a "double-hit" to emerging markets, adding capital outflows and higher borrowing costs to their growth challenges, the Fund said.

VIRUS, SPENDING RISKS

The IMF said other downside risks remain significant globally, including the potential for new, highly contagious coronavirus variants to lead to new restrictions on movement and reduced economic activity.

In one scenario affecting both emerging markets and advanced countries with high vaccine hesitancy, the Fund said 0.8 percentage point could be shaved from global GDP growth this year and in 2022 – resulting in a global output loss of around $4.5 trillion by 2025.

Another significant downside risk is the potential for U.S. infrastructure and social spending plans to be scaled back, the IMF said, amid deep divisions between Democrats and Republicans in Congress. The IMF estimated the proposed spending would boost U.S. growth by 0.3 percentage point in 2021 and 1.1 percentage points in 2022.

The Fund left its policy prescriptions for countries largely unchanged: prioritize health spending, especially for vaccinations, support vulnerable households and firms and invest in education, training and projects that boost productivity, and accelerate the transition to a low-carbon economy.