Nations must be ‘absolutely vigilant’ about inflation – IMF

The economic recovery has weakened in most rich nations due to the impact of the Delta variant of coronavirus, the International Monetary Fund (IMF) says.

It also told the BBC inflation would “stay elevated” for the next few months in countries like the UK and US and central banks needed to be vigilant.

It cut its 2021 growth forecasts for advanced economies – in particular the US, Japan and Germany – but said most would grow strongly next year.

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But it said poorer ones may fall back.

Separately, the fund voted to keep Kristalina Georgieva as its head after she was engulfed in a data rigging scandal.

Ms Georgieva had vehemently denied claims she pressured staff to alter data in favour of China when she was head of the World Bank.

Risks increase

The global economy contracted sharply in 2020, but rebounded strongly in the first half of this year as countries unlocked.

However, in its latest World Economic Outlook, the IMF said “momentum had weakened” since then as the highly transmissible Delta variant of coronavirus stopped “a full return” to normality.

IMF chief economist Gita Gopinath said one of the biggest problems was high inflation, particularly in the UK and US where it is running at 3.2% and 5.3% respectively.

This was partly due to a “mismatch between demand and supply”, but also in the case of the UK soaring gas prices.

She said inflation was likely to stabilise in most placed by mid 2022, although it would take until 2023 in the UK. However, she central banks “should absolutely be vigilant about what’s happening”.

Ms Golpinath also blamed the slowdown on continued health risks and supply chain disruption, warning that “risks to economic prospects have increased”.

Slower growth

The IMF cut its projection for global growth in 2021 only marginally to 5.9%, but said it masked large downgrades for some rich countries.

  • Notably it expects the world’s largest economy, the US, to grow by only 6% this year, down from the 7% the fund forecast in July .
  • It said Japan and Germany, the third and fourth largest, would expand by 2.4% and 3.1% respectively – down from 2.8% and 3.6%.

The UK’s economy is forecast to grow by 6.8% this year, down from the previous forecast of 7%.

However, the IMF expects most advanced economies to return their pre-pandemic growth trends next year as supply chain issues ease, and to exceed it by about 1% in 2024. By contrast, it said emerging and developing economies (excluding China) could fall back and remain 5.5% below their pre-pandemic forecast by 2024.

A woman being vaccinated in India
The fund says there is a growing “vaccine divide” between rich and poor nations

“These divergences are a consequence of the ‘great vaccine divide’ and large disparities in policy support,” Ms Gopinath said.

“While over 60% of the population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96% of the population in low-income countries remain unvaccinated.”

The hit to these countries’ living standards would be “much higher” now, she told the BBC.

On fiscal policy, the IMF said countries would have to tread fine between controlling inflation and giving their economies enough stimulus to recover.

It said that debt in many countries was at record levels due to emergency pandemic spending, and employment remained significantly below pre-pandemic levels.

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