The International Monetary Fund (IMF) has published its latest growth outlook for the world’s major markets, with the group forecasting that the global economic recovery is set to continue, despite the resurgence of Covid-19 in parts of the world.
Fueled by the highly transmissible Delta variant, the recorded global Covid-19 death toll has risen close to five million, and health risks abound, holding back a total return to normalcy, the IMF said in a report on Tuesday (12 October).
“Pandemic outbreaks in critical links of global supply chains have resulted in longer-than-expected supply disruptions, further feeding inflation in many countries. Overall, risks to economic prospects have increased, and policy trade-offs have become more complex.
“Compared to our July forecast, the global growth projection for 2021 has been revised down marginally to 5.9% and is unchanged for 2022 at 4.9%.”
This modest headline revision, however, masks significant downgrades for some countries, the group warned.
The outlook for the low-income developing country group has darkened considerably due to worsening pandemic dynamics, it said. The downgrade also reflects more difficult near-term prospects for the advanced economy group, in part due to supply disruptions.
In a positive change, the IMF forecasts that South Africa’s economy is set to rebound despite global challenges, and it has upwardly revised South Africa’s growth outlook from 4% to 5% for 2021.
However, the group has indicated that this growth will not be sustained, with growth expected to slow to a negligible 2% in 2022.
IMF explained this annual discrepancy as a broader trend seen across emerging and developed markets.
“Aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9% in 2024.
“By contrast, aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5% below the pre-pandemic forecast in 2024, resulting in a larger setback to improvements in their living standards.
The IMF said these economic divergences are a consequence of large disparities in vaccine access and policy support.
“While almost 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.
“Emerging and developing economies, faced with tighter financing conditions and a greater risk of de-anchoring inflation expectations, are withdrawing policy support more quickly despite larger shortfalls in output.”
The unrest took its toll
If not for the civil unrest in Gauteng and KwaZulu Natal in July, the South African economy could have recouped most of last year’s pandemic-induced GDP losses by the end of 2021, the South African Reserve bank said in a research note last week.
The central bank expects the economy to contract 1.2% in the third quarter and for growth to average 5.3% in 2021 – a sharp recovery from last year when output fell the most in almost three decades.
Should that translate to higher demand, risks to the inflation outlook could become more pronounced.
While South Africa’s modest inflation trajectory underpinned the MPC’s decisions to keep the key rate on hold since July 2020, risks to the outlook “have risen and become more broad-based, while real rates have become more negative as expected inflation has risen,” the bank said.
“These developments imply a need for interest rates to begin normalizing. The nominal repo rate is expected to gradually rise toward its neutral level over the medium term,” it said.
The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide, indicates a 25-basis point increase in the final quarter of this year and every quarter of 2022 and 2023.
Forward-rate agreements, used to speculate borrowing costs, are pricing in an almost 100% chance of a quarter-point increase at the bank’s November meeting, while most economists expect the benchmark to remain unchanged until the first quarter of next year.
That’s as economists expect the MPC to continue supporting an economy seen contracting in the three months through September, partly due to deadly riots, arson and looting that erupted in July and derailed economic activity in the two biggest provinces by contributing to gross domestic product.