IMF sees higher inflation as supply chains and Omicron slow economic growth

The International Monetary Fund (IMF) painted a downbeat picture of the global economic outlook, as it revised down its growth forecasts citing supply disruptions and the ongoing pandemic as two factors hampering recovery.

Global growth will slip to 4.4% in 2022, from 5.9% in 2021, the IMF predicted in its latest World Economic Outlook report. That’s half a percentage point lower for this year than in the October report, and reflects downgrades to the outlooks for the US and China. Global growth is expected to slow to 3.8% in 2023.

“The global economy is entering 2022 in a weaker position than anticipated,” the report said. “News of the Omicron variant led to increased mobility restrictions and financial market volatility at the end of 2021. Supply disruptions have continued to weigh on activity. Meanwhile, inflation has been higher and more broad-based than anticipated, particularly in the United States.”

The forecast assumes adverse health outcomes will fall to low levels in most countries by the end of this year and vaccination rates improve around the world.

What's more, the risks to these predictions are “tilted to the downside”, the IMF said. Slow vaccination programmes in many emerging-market and developing economies are hindering the recovery in those undervaccinated countries.

“The most pressing health risk is the impact of the Omicron variant,” the IMF said. “Even if symptoms are less severe, increased transmissibility could still add to labour shortages and put extra pressure on hospitals, prompting tighter and longer-lasting mobility restrictions beyond the first quarter.”

This would hold back global growth even more, it said, as could the risk of further new variants.

Disruption to global trade brought about by the pandemic and changes in behaviour have led to shortages, supply chain interruptions and higher prices for imported consumer goods, the IMF report said. This has been “particularly severe” in the US, it confirmed, adding that supply disruptions shaved 0.5–1 percentage point off global GDP growth in 2021 while adding 1 percentage point to core inflation.

The longer these supply chain issues persist, “the more likely they are to feed through to expectations of higher future prices and the larger the risk to the world economy”.

Inflation was a key topic of the report, with the IMF saying high rates of price gains will “persist for longer than envisioned” in its October assessment, kept elevated by the supply chain disruptions and by higher energy prices.

The factors driving up the rate of inflation varied by country, with fossil fuel prices almost doubling in the past year, food prices increasing in sub-Saharan Africa and higher imported goods prices boosting inflation in the Latin America and the Caribbean region, the report said.

By country, the US 2022 growth forecast was revised down 1.2 percentage points to 4%, on the back of a withdrawal of monetary accommodation and supply chain disruptions. In China, a broader slowdown has evolved after disruption in the housing sector and a strict zero-COVID strategy is holding back expansion, leading to a 0.8 percentage point downgrade in the forecast to 4.8%.

The majority of countries covered by the report had their forecasts lowered compared with the October forecast, with outlooks weakening in Brazil, Canada, the euro area, Mexico, Russia, South Africa and the UK.

The economic outlook was also front and centre during discussions at Davos Agenda 2022, with world leaders commenting on the impact of the pandemic and the recovery.

Conversations at Davos Agenda 2022 focused on the COVID-19 pandemic response, the economic recovery, climate action, technological innovation and global collaboration.

Speakers including John Kerry, the US Special Presidential Envoy for Climate, emphasized the need for climate action. Climate risks top the World Economic Forum's Global Risks Report 2022, which analyzes global perceptions among risk experts and world leaders in business, government, and civil society.

Climate change was also cited by the IMF as being a “grave” risk to the global economy. The probability of major natural disasters remains elevated, it said, underscoring the cloudy outlook the world is facing.

“We are seeing challenges mounting from supply chain disruptions to tectonic shifts in labour markets, to inflation figures which are of concern to policy-makers and individuals alike,” Klaus Schwab, Founder and Executive Chairman of the World Economic Forum told the Davos Agenda 2022. “The year ahead is a crucial one to work together, rebuild trust and shape a better and more inclusive future for all.”