Breaking News: IMF Economic Outlook Adds to Stagflation Fears, Growth Revised Lower

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IMF ECONOMIC OUTLOOK SUMMARY

  • Lower growth revision conceals increasing divergence between developed economies and developing economies.
  • Inflation risks: Commodity prices, supply chain constraints and COVID-19.
  • Focus going forward: Increase vaccine rollouts, combat climate change and clarity around central bank decisions.
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IMF growth projections

Source: IMF

IMF ECONOMIC OUTLOOK 2021

SUPPLY DISRUPTIONS FEEDING INFLATION

Revised 2021 global economic growth now sits at 5.9% which was previously 6.0%. IMF’s Chief Economist Gita Gopinath has emphasized the marginal downgrade to economic growth does not reveal the underlying severity in the case of developing nations. The stagflation-like environment may linger and become more prevalent to central banks with lower growth expected in conjunction with high inflation throughout the remainder of 2021 and the beginning of 2022. The outlook for 2022 remains the same at 4.9% where she attributes vaccination progression deviation as a major contributor. The graphic below shows the lag in vaccinations between advanced and developing nations.

vaccine rollout global comparison

Source: IMF

The International Monetary Fund’s (IMF) previous economic outlook report eluded to inflation being transitory and that central banks should push through this period of high “temporary” inflation figures before looking to tightening measures. The change in tone reflected in today’s revision is in stark contrast with more focus around inflation concerns. This year we have seen commodities (energy) rally and will be monitored closely should the price appreciation become more persistent. Quoted in their inflation report below, their view is quite clear:

“A sharp rise in commodity prices and sectoral inflation dispersion over the next 12 months would have a strong but temporary impact on headline inflation. Inflation expectations could overshoot but revert to trend over the medium term.”

PROBLEM EXCACERBATED FOR LOWER INCOME COUNTRIES

“Inflation accelerations are associated with sharp exchange rate depreciations in emerging markets.” The above excerpt from the IMF report does not bode well for Emerging Market (EM) and lower income nations as economic growth is likely to become stifled in the current economic climate – see graphic below.

advacned vs developing economies

Source: IMF

Tomorrow U.S. inflation data will give further guidance to markets and may reiterate the cause for concern by the IMF should the inflation print come in higher than expected.

ECONOMIC CALENDAR

inflation economic calendar

Source: DailyFX economic calendar

— Written by Warren Venketas for DailyFX.com

Contact and follow Warren on Twitter: @WVenketas

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