IMF upgrades 2021 global GDP forecast to 6%, warns of divergence

The International Monetary Fund (IMF) has raised its 2021 global GDP growth forecast to 6%, up from an estimate of 5.5% made in January. In either case, the projection for 2021 will mark a big turnaround from an estimated contraction of 3.3% last year, when the global economy was savaged by the Covid-19 pandemic.

For 2022, global GDP growth is seen to moderate to 4.4%, versus 4.2% estimated in January.

IMF chief economist Gita Gopinath says the slightly more upbeat estimate is a reflection of additional fiscal support provided in the US, widespread vaccination efforts that are going to lead to a strengthening of recovery in the second half of this year, and also the continued resilience of economic activity to the pandemic in many parts of the world.

However, she stresses that a high degree of uncertainty surrounds the IMF’s projections as the pandemic is still ongoing, and, in many countries, the number of confirmed cases is growing.

As such, there is a risk of growing divergence in recoveries both across and within countries, as economies with slower vaccine rollout, more limited policy support, and more reliant on tourism do less well.

According to Gopinath, multi-speed recoveries could pose financial risks if interest rates in the US rise further in unexpected ways.

This could cause inflated asset valuations to unwind in a disorderly manner, financial conditions to tighten sharply, and recovery prospects to deteriorate, especially for some highly leveraged emerging markets and developing economies.

Gopinath says policymakers will need to continue supporting their economies while dealing with more limited policy space and higher debt levels than prior to the pandemic. This requires better targeted measures to leave space for prolonged support if needed.

She is also urging central banks to keep access to money easy in the current environment “Monetary policy should also remain accommodative while proactively addressing financial risks that we do see using macro prudential tools.” — The Edge Singapore E