WEO October 2021 Report: Downside Risks to a Robust Global Recovery

October 13, 2021/Proshare

by FBNQuest Research

Image Credit: IMF

The IMF’s World Economic Outlook which was published yesterday (titled Recovery During a Pandemic) has a more sombre tone than its update report in July. The Fund cut its global growth projection by 10bps to 5.9% for this year but kept its FY ’22 forecast unchanged at 4.9%. The modest downward revision for ’21 masks large downgrades for some countries which are partially offset by improved near-term prospects for some commodity-exporting economies. For FY ’21, the largest output downgrade was for the US whose growth was revised down by -100bps to 6.0%. We also highlight adjustments of -40bps for Japan, and -10bps each for China and Brazil. The report notes that the momentum of global recovery has weakened due to the effects of the pandemic, which has drawn out disruptions to global supply chains and fueled inflation in many countries. 

The Fund noted that uneven access to vaccines and policy support is causing a divergence in economic growth prospects across countries, particularly between the advanced economy group and low-income countries.

While significant fiscal and monetary policy support which have helped to speed up recovery in advanced economies are set to continue well into FY ’22, many emerging and developing nations are reducing policy support due to their tighter fiscal conditions.

Given the divergent recovery speeds for the different economy groups, the Fund estimates that output for advanced economies will return to the pre-pandemic trend by FY ’22 and exceed it by 0.9% in FY ’24. On the other hand, real output for emerging and developing economies (excluding China) is expected to remain 5.5% below the pre-pandemic trend in FY ’24.

The Fund advises central banks to be ready to move swiftly and take pre-emptive action if the recovery improves faster than expected. As an illustration, it cited the Bank of Canada’s decision to reduce its asset purchase program in April and July amidst a robust recovery.  

The Fund also mentioned the monetary policy challenge posed by risks linked with extended accommodating policies and easy financial conditions, which might lead to excessively stretched asset values and exacerbate financial vulnerabilities.

The update’s assumptions, based on the futures markets for the Fund’s basket of three crude blends (including UK Brent), now show an increase of 59.1% this year to US$65.7/b and a modest decline of -1.8% for ’22 to US$64.5/b. 

Forecasts for Nigeria and Sub-Saharan African economies have been raised by 10bps and 30bps to 2.6% and 3.7% respectively.

Trends in world output growth (% chg y/y)        
  2020e 2021f 2022f
World -3.1 5.9 4.9
US -3.4 6.0 5.2
Eurozone -6.3 5.0 4.3
Japan -4.6 2.4 3.2
Brazil -4.1 5.2 1.5
Russia -3.0 4.7 2.9
India -7.3 9.5 8.5
China 2.3 8.0 5.6
SSA -1.7 3.7 3.8
Nigeria -1.8 2.6 2.7
South Africa -6.4 5.0 2.2
Sources: IMF, World Economic Outlook update, Oct ’21; FBNQuest Capital Research

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