India would still be the fastest growing economy among large economies with GDP above $1 trillion. But the WEO report is about how the world economy is likely to pan out and here are some interesting insights from the IMF WEO on global growth triggers.
Global growth is recovering but favouring advanced economies
Speaking at the post-publication press conference, IMF Chief Economist Gita Gopinath highlighted the widening gap between advanced economies and emerging markets in the recovery. The WEO has forecast 6% GDP growth for the global economy for 2021
The IMF pointed out that the growth of advanced economies had improved by 50 bps which was offset by EMs losing 50 bps of growth due to COVID 2.0. Emerging Asia is likely to be the worst hit. For 2022, the world economy is projected to grow at 4.9%. Again, GDP growth of advanced economies has been substantially upgraded while the upgrade is modest for EMs. Nearly, 40% of people in advanced economies are fully vaccinated against 11% in ROW.
Advanced economies could afford better fiscal support and infused $4.6 trillion during COVID. Emerging Markets and developing economies could only afford a fraction of that. This created a situation where fiscal support was uneven, but most EMs and developing economies ended up importing commodity inflation from other countries and paying a steep price in the form of price instability.
Financial impact of Delta Variant or COVID 3.0
Irrespective of the nomenclature, this remains the big risk. According to Gita Gopinath, emergence of highly infectious virus variants could derail the recovery and wipe out $4.5 trillion of nominal GDP by 2025. The IMF assessment is that if a new version of the pandemic returns, most emerging markets could get caught in a vortex of worsening health crisis coupled with tightening financial conditions.
As per IMF, the goal should be to vaccinate at least 40% of the population in every country by Dec-21 and 60% by Jun-22. This is likely to cost $50 billion but will be worth the effort. The IMF called upon countries with surplus vaccine doses to share, at least, 1 billion doses while vaccine manufacturers must prioritize deliveries to low and middle income countries. IMF has called for an immediate lifting of all trade restrictions on vaccines.
To ensure adequate liquidity for weaker economies, IMF has suggested a general allocation of SDRs equivalent to $650 billion to provide liquidity buffers for countries and help them address essential spending needs. IMF has also called for debt restructuring in cases where debt is already unsustainable.
What happens to India, China and South East Asia?
This is the segment that drives growth, demand, exports and alpha in global GDP. This segment has been struggling. As per IMF, the big challenge for countries like India is the slow pace of vaccinations combined with rising inflation and jobs at threat. In fact, the reason IMF scaled down the original growth estimates for this region is because of the disproportionate impact of the Delta variant.
On inflation, IMF pointed out that among developed nations, inflation is a challenge only in the US, while EU region was safe. Among EMs, India has an issue with inflation but China does not. According to IMF, the high inflation had two triggers. The first was the low inflation base, which makes yoy inflation optically steep. Secondly, when demand recovery started, supply chain constraints ensured that production could not keep pace. This resulted in a spurt in inflation as defensive inventory build-up also caught on.
Some upgrades and some downgrades for the world economy
IMF has upgraded growth for the US and the EU. Two developed economies which got the best upgrades are the UK and Canada. According to the IMF, UK and Canada undertook vaccination of their population on a war-footing and the benefits are visible. Japan has been downgraded due to sharp restrictions imposed due to the new variant. The Olympics are unlikely to have a salutary impact.
Among emerging markets, growth for Russia has been upgraded for 2021 but downgraded for 2022. India GDP has been downgraded by 3% for FY22, although absolute growth is still likely to be the best among large economies. Most of Latin America will benefit from the commodity price boom and hence their growth has been upgraded, especially Argentina and Brazil. However, Brazil growth has been downgraded for 2022 due to faster than expected growth in 2021. Interestingly, China growth for 2021 has been downgraded by 30 bps for 2021 as the fiscal support in China has been lower than expected. However, there is a small upgrade for FY22 on export demand spurting in 2022.
The big theme of the World Economic Report appears to be that the advanced economies are enjoying the fruits of the recovery better than the emerging markets and LDCs. For India, the focus has to be on rapid vaccination and effectively preventing another pandemic.