The upswing is faltering, the IMF revises its growth forecast

Berlin, Washington It sounds like a crisis, what the International Monetary Fund (IMF) writes in its World Economic Outlook (WEO) published on Tuesday. There is talk of an “increased risk of social unrest”, “real risks” and “global consequences”.

The IMF economists estimate that global economic output will increase by 5.9 percent in 2021. They lower their forecast from July minimally. For 2022, the expectation remains at 4.9 percent.

“The global upswing continues, but the momentum has weakened,” says the WEO. After 2022, growth in global gross domestic product (GDP) is projected to slow down to around 3.3 percent in the medium term.

Three conflicts make the upswing a fragile construct, albeit with major disparities between the regions around the world. The emerging and developing countries continue to suffer enormously from the corona pandemic – and must fear long-term consequences from the virus.

Developed economies: pandemic under control, problematic supply chains and inflation

The industrialized nations, on the other hand, are breaking free from the pandemic clutches, but are facing the next difficulties: escalating delivery bottlenecks and risky inflation increases. “The dangerous divergence in economic prospects between the countries is still a cause for great concern,” writes IMF chief economist Gita Gopinath.

The corona pandemic hit almost the entire world. The developed economies, however, have long since overcome the resulting economic downturn.

Sixty percent of the population in advanced economies is fully vaccinated. “Because of the population’s growing vaccination protection, the economy is likely to be much less burdened in the coming winter than before,” says Geraldine Dany-Knedlik, an expert on the world economy at the German Economic Research Institute (DIW).

Nonetheless, the industrialized nations are not immune to pandemic-related upheavals. At 5.2 percent, the growth prospects are below average. In many countries, a split has set in in the manufacturing sector: the order books are full and the consumer mood is high, but production is not keeping up.

The supply chains pose significant problems. Some ports are closed to protect against infection, containers and personnel are scarce.

As a result, there is a lack of preliminary products and raw materials. And if these do arrive, they are all the more expensive. This results in the next weak point: inflation. In its base scenario, the IMF expects price increases of 3.6 percent in the developed economies in the last few months of this year. After that, rates would be reached again as before the crisis – only two percent in mid-2022.

But it could also turn out differently. In an extreme scenario, the rise in the price level would level off at three percent in 2022. That would be a problematic development.

The general uncertainty about the further development of the price level is pronounced because it is not clear when the temporary effects will actually disappear: “These uncertainties stir up concerns that inflation could lead to a self-fulfilling inflation spiral,” writes IMF chief economist Gita Gopinath .

Higher inflation expectations made saving less attractive; instead, more would be consumed. The IMF emphasizes that its own forecast is “associated with considerable uncertainties”. The organization therefore calls for “clear communication” to prevent fears of inflation. A plan is needed for a possible exit from the expansionary monetary policy.

Spotlight Germany: Cars without semiconductors

The delivery bottlenecks are a problem especially in Germany. Above all, there is a lack of semiconductors, which affects the economically so important automotive sector enormously.

At the same time, the export-oriented German economy cannot export as much as it would like. With 3.1 percent expected growth this year, the IMF is still comparatively optimistic compared to other economic researchers.

Obviously, the economists are assuming that a larger part of the delivery problems will disappear this year. In 2022, the IMF expects economic growth to be 4.6 percent higher.

The foreseeable effects on prices should nevertheless be enormous. Over the year as a whole, the IMF expects consumer prices in Germany to rise by up to four percent. For the euro area, the expectation is only 2.9 percent.

Prices in Germany have been rising for several months. Most recently, the inflation rate rose to 4.1 percent in September compared to the same month last year. The price level stagnated compared to August.

But as early as next year, the inflationary climate in this country is expected to cool down again, to be only 1.5 percent and level off at 2 percent by 2026. For Germany, the average inflation remains “limited”, according to the IMF.

Spotlight on the USA: Between growth engine and investment blockade

The USA is and will continue to be the engine of growth – but there is hardly any other country where the upswing is as strained as in the United States. The IMF is forecasting growth of six percent for the current year. However, the fund had to revise its outlook down by one percentage point compared to the summer.

Recently there have been some signs of a less powerful upswing in the US, both consumer confidence and the job market are weakening – and supply chains are causing the most trouble.

Hundreds of cargo ships are currently stuck in American ports, the waiting time is weeks. The labor shortage exacerbates the situation because there are simply too few port staff. The IMF suggests that the crisis could last longer than initially thought.

A major threat to the upswing is homemade. Because the trillion investments that US President Joe Biden had promised when he took office have still not been implemented.

The IMF calculates the more than four trillion expensive packages in its growth forecasts – it would be the largest investments in infrastructure, climate protection and social programs that have ever been made in the USA in one go.

US President Biden

The promised trillion investments have still not been implemented.

(Photo: action press)

However, for the moment it is unclear whether the reforms will ever be decided. The president recently signaled that investments could be significantly smaller. “Any major change […] the fiscal package will have an impact on the growth prospects of the US and its trading partners, ”warns the fund.

The IMF is increasingly concerned about the tense mood in political Washington. Biden’s vision of sustainable, permanent growth after the pandemic can hardly be turned into reality with narrow majorities in Congress.

After all, Congress was able to avert impending national bankruptcy for the time being. However, the decision is only valid until the beginning of December, and a long-term agreement is not in sight.

Emerging and developing countries: Sluggish vaccination campaign harbors considerable uncertainties

The economically backward countries are currently growth drivers – and yet they pose the greatest risk to the global economy. With 6.4 percent GDP growth, they should be above the global average this year.

But it is very possible that the coronavirus will remain a longer-term problem. “Every country will be potentially exposed to the coronavirus and remain vulnerable as long as the pathogen can spread rapidly through unvaccinated populations in any part of the world,” says British economist Nicholas Stern. 96 percent of the population in low-income countries are not vaccinated.

The IMF’s fears: “Having to live with Covid-19 all the time means that activity in many high-contact sectors may never return to pre-pandemic levels.”

The organization estimates the medium-term downside risk to be more than one percentage point less growth per year. The IMF therefore sees the industrial nations’ alliances G7 and G20 as having a duty. They would have to quickly provide vaccine to poorer countries. Otherwise, according to the IMF, $ 5.3 trillion of global economic output is at stake.

China in the spotlight: Debt is becoming a problem

With almost five times as much debt as equity, staggering real estate developer Evergrande is the epitome of what the political leadership in Beijing is currently fighting against. The government has declared war on “fictional growth” – generated solely through debt.

If you add the public sector, corporate and household debt together, 287 percent of China is indebted to business leaders. “China’s debt problem could have a domino effect and weaken China’s economic strength, with enormous global repercussions,” warns Lisandra Flach, head of the Ifo Center for Foreign Trade.

This is also shown by the IMF forecast. With eight percent this year and 5.6 next year, China is hardly a growth driver any more.

The People’s Republic is already pulling the growth stars of the second row down with it. The group of nations around Indonesia, Malaysia, the Philippines, Thailand and Vietnam known as the Asian Five will only grow by 2.9 percent this year. Just three months ago, the IMF had expected one and a half percent more.

More: Four reasons for the weak growth in Germany

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