IMF more upbeat on global economy, but warns new Covid variants could derail growth

LONDON — The International Monetary Fund has become more upbeat about the global economy, as coronavirus vaccinations are administered across the world. It is, however, worried about the risk new Covid variants pose to the post-pandemic recovery.

According to its latest World Economic Outlook, published Tuesday, the institution now expects the global economy to grow 5.5% this year — a 0.3 percentage point increase from October’s forecasts. It sees global GDP (gross domestic product) expanding by 4.2% in 2022.

“Much now depends on the outcome of this race between a mutating virus and vaccines to end the pandemic, and on the ability of policies to provide effective support until that happens,” the IMF’s Chief Economist Gita Gopinath said in a blog post.

“There remains tremendous uncertainty and prospects vary greatly across countries.”

The world has seen surging numbers of Covid-19 infections and deaths over the past few months, as new variants of the coronavirus have spread rapidly. These have been described as more infectious and are potentially deadlier than the original strain.

As a result, many countries have stepped up their social restrictions, which has inflicted further economic pain.

In fact, the IMF cut its GDP forecasts for the euro zone this year by 1 percentage point. The 19-member region, which has been severely hit by the pandemic, is now expected to grow by 4.2% this year.

Germany, France, Italy and Spain — the four largest economies in the euro zone — also saw their growth expectations cut for 2021.

Economic activity in the region slowed in the final quarter of 2020 and this is expected to continue into the first part of 2021. The IMF does not expect the euro area economy to return to end-of-2019 levels before the end of 2022.

On the other hand, the United States is set to grow more than expected this year, according to the IMF.

The Fund revised its GDP forecast upward by 2 percentage points on the back of a strong momentum in the second part of 2020 and additional fiscal support. GDP is now seen at 5.1% this year.

The U.S. Congress approved almost $900 billion in a stimulus package in December and President Joe Biden has suggested that more relief packages could come soon.

Looking at emerging markets, China is set to grow above 8% this year, the IMF said.

“China returned to its pre-pandemic projected level in the fourth quarter of 2020, ahead of all large economies. The United States is projected to surpass its pre-Covid levels this year, well ahead of the euro area,” Gopinath said on Tuesday.

The IMF reiterated that governments will need to keep supporting their economies via fiscal stimulus in order to bolster economic recovery.

“Policy actions should ensure effective support until the recovery is firmly underway, with an emphasis on advancing key imperatives of raising potential output, ensuring participatory growth that benefits all, and accelerating the transition to lower carbon dependence,” Gopinath added.