The International Monetary Fund expects high inflation to recede in most advanced economies by the middle of next year, but warns that there is tremendous uncertainty around the outlook for both economic growth and inflation due to supply chain disruptions that have convulsed the global economy and pushed up consumer prices around the world.
The IMF delivered this message in its semi-annual World Economic Outlook report. The document downgraded the fund’s global growth forecast for the year and emphasized the need for a more equitable distribution of COVID-19 vaccines from wealthy countries to developing and middle-income countries.
Central banks should be prepared to act quickly if inflation proves to be more persistent than expected, said IMF chief economist Gita Gopinath.
“We have never seen a recovery of this kind where you have shortages in the labour market at the same time that you have high levels of unemployment; the fact that you have ports that aren’t able to offload container ships,” Ms. Gopinath said in a Tuesday news conference.
“We have to be particularly vigilant to make sure these particular supply-side shocks don’t end up de-anchoring inflation expectations or creating wage-price spirals, because that is when it will start showing up in more core inflation, and then require a very strong monetary policy response,” she said.
In Canada, the annual rate of inflation has run above the central bank’s 1-per-cent to 3-per-cent target band since April, hitting an 18-year high of 4.1 per cent in August. Last week Bank of Canada Governor Tiff Macklem argued the causes of the inflation spike would likely prove transitory, although he acknowledged high inflation could be “a little more persistent” than the central bank previously thought.
The combination of high inflation and slowing growth has led some commentators to raise the possibility that we’re heading into a period of stagflation – economic stagnation and high inflation – similar to the 1970s and early 1980s.
Ms. Gopinath dismissed this idea. Even though the IMF trimmed its growth outlook slightly, it still expects the global economy to expand by 5.9 per cent this year and 4.9 per cent next year. “This is not something that looks remotely close to stagflation,” Ms. Gopinath said.
At the same time, the current situation poses a distinct challenge for monetary policy makers. Central bankers typically aim to control inflation by influencing economic demand through adjustments of interest rates and borrowing costs. They don’t really have tools to deal with supply-side constraints, such as factory closings, shipping congestion and health-related lockdowns.
Mr. Macklem said last week the bank is watching a number of indicators to see if one-time price jumps turn into more persistent inflation. Short-run inflation expectations have moved up, but medium and long-term expectations remain well anchored, he said. And there are few signs that wages are running ahead of productivity growth and becoming an independent driver of inflation.
The IMF downgraded Canada’s 2021 GDP growth forecast to 5.7 per cent from 6.3 per cent, but upgraded its 2022 GDP growth forecast to 4.9 per cent from 4.5 per cent.
Another key theme of the IMF’s report was the “dangerous divergence” between advanced economies and the rest of the world. The IMF expects output in advanced economies to return to prepandemic forecasts by next year, and exceed them by 2024. By contrast, emerging markets and developing economies, excluding China, are expected to remain 5.5 per cent below the prepandemic forecast in 2024.
The biggest driver of this divergence is the “great vaccine divide.” The IMF estimates that over 60 per cent of people in high-income countries are fully vaccinated. In low-income countries, by contrast, around 96 per cent of the population remains unvaccinated.
Ms. Gopinath said high-income countries need to do more to fulfill existing vaccine donation pledges and remove trade restrictions on the flow of vaccines and their inputs. Vaccine manufacturers should also expand regional production to developing countries, she said.
“Recent developments have made it abundantly clear that we are all in this together, and the pandemic is not over anywhere, until it’s over everywhere. If COVID-19 were to have a prolonged impact into the medium term, it could reduce global GDP by a cumulative US$5.3-trillion over the next five years, relative to our current projections. It does not have to be this way,” she said.
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