IMF keeps faith with recovery and an eye on inflation
Recovery still strong. The International Monetary Fund's latest twice-yearly update to its economic outlook expects the global economic recovery to remain strong, with growth of 5.9% in 2021 and 4.9% in 2022. The IMF only minimally trimmed its 2021 forecast, citing recent supply chain issues and ongoing pandemic problems in some countries. It sees healthy recovery continuing in both the United States (growth of 6% and 5.2% in 2021 and 2022, respectively) and euro zone (5.0% and 4.3%), helped by the US Biden plans and Next Generation EU Fund. In emerging economies, a slight markdown to China's growth outlook (8% and to 5.6%) is more than offset by buoyant commodity-exporting nations boosted by recent price rises.
Risk of more inflation. The IMF now sees inflation rising strongly by year-end, easing in mid-2022, and then falling back to pre-pandemic levels. For developed economies this translates as 2.8%and 2.3% in 2021 and 2022, respectively. Looking through the numbers, the report stresses that “inflation risks [are] tilted to the upside” and cautions central banks not to delay action if price pressures show signs of embedding. The Fund also points up the “tightrope” policymakers must walk, between supporting the post-Covid bounceback by keeping rates low while watching out that current price pressures do not turn into more persistent inflation.
Financial risks If central banks are slow to respond. Financial conditions remain highly accommodating in advanced economies, largely thanks to central bank policies, and should continue delivering real support to markets in a range of assets, especially financials and real estate. However, if central banks wait too long to respond they face inflationary risks that could require a more hawkish policy tightening and put heavier strain on these assets’ values.
Bottom line. The IMF's outlook broadly chimes with our own: sustained growth subject to a number of risks. We stand by our prudent portfolio allocation, with interest rates set to rise further and equity market volatility likely to persist for the next few weeks.