Divergent growth expectations

Doaa A. Moneim, Wednesday 13 Oct 2021

International Monetary Fund chief economist Gita Gopinath talks about the global growth trends described in its World Economic Outlook, including forecasts for Egypt, in an interview with Doaa A. Moneim

Divergent growth expectations

What are the key themes that characterise the global economy’s current condition and outlook?
The global economy continues to recover even as the Covid-19 pandemic resurges. Since our July World Economic Outlook (WEO) forecast, growth has progressed broadly as expected, although momentum is slowing amid the resurgence of Covid-19. Divergences persist between countries, driven by uneven vaccine access and policy support, which are expected to leave lasting scars.

Inflation has increased widely, though to different extents across countries. In most countries, rising inflation reflects base effects from a year ago, ongoing pandemic-related supply-demand mismatches, and higher commodity prices. For the most part, price pressures are expected to subside in 2022. That said, inflation risks are skewed to the upside, depending on the path of the pandemic, the duration of supply disruptions, and the behaviour of inflation expectations.
Overall, risks to economic prospects have increased, and policy trade-offs have become more complex.

What are the IMF’s projections for capital and foreign direct investment inflows to developing countries and emerging economies, especially in the Middle East and North Africa (MENA) region?

There was a brief episode of capital outflows from the MENA region in early 2021, as experienced by emerging markets elsewhere, due to inflation concerns in the United States. These flows reversed in May as inflation fears subsided. Since then, emerging markets in the MENA region have experienced cumulative net capital inflows. Countries in the region have continued to tap international markets, benefiting from favourable financing conditions, with the latest issuance in the region being Egypt.

Overall, given large financing needs, emerging market countries remain vulnerable to a rise in global bond yields. A sudden tightening in global financial conditions could lead to capital outflows and higher sovereign spreads, exposing particularly those with lower reserves and weaker external accounts.

After a slowdown during the pandemic, foreign direct investment to emerging market and middle-income countries, including to those in the MENA region, is expected to gradually pick up as the regional and global recovery firms up.

According to the latest WEO, the IMF has maintained Egypt’s GDP growth projections in 2022 at 5.2 per cent, while revising up expectations for 2021 to 3.3 per cent. What are the key reasons behind the two projections?

The upward revision to growth in the 2020-21 fiscal year reflects the latest official data, which came out slightly stronger than we last projected, predominantly in the third quarter of the fiscal year. The forecast for 2021-2022 remains unchanged, with the outlook dependent upon the speed at which the pandemic-related interruption to growth momentum fades. While there are headwinds from the uneven pace of the global recovery and subdued tourist receipts, growth is still expected to rebound strongly to 5.2 per cent. The balance of risks also remains broadly similar to our July WEO forecast.

Downside risks prevail from the low pace of vaccination, as well as from Egypt’s vulnerability to external shocks as global financial conditions tighten. On the upside, a faster resumption in tourism flows would further boost the economy.

Egypt’s inflation is expected to accelerate to hit 6.3 per cent in 2022, according to the WEO. To what extent do global inflation fears contribute to that?

Headline inflation increased from 4.1 per cent in April 2021 to 5.7 per cent in August 2021, largely reflecting base effects from food prices, which fell in the same period in 2020. Over the forecast horizon, we expect inflation to converge to around seven per cent, the midpoint of the Central Bank of Egypt (CBE)’s target band, as base effects dissipate and increases in global commodity prices gradually feed into input and consumption prices.

Do you consider that such fears could affect monetary policy in developing countries, including in Egypt?

Some emerging markets and developing economies have already raised policy interest rates in response to inflationary pressures, and markets indeed do expect a steeper policy path there compared to the United States.

In emerging markets and developing economies where inflationary pressures remain transitory and inflation expectations well-anchored, central banks should maintain accommodative monetary policy to support the much-needed recovery. However, if price pressures prove persistent and inflation expectations appear to de-anchor, quick and decisive tightening is needed.

Regarding Egypt, headline inflation is currently within the CBE’s target band (seven per cent ± two percentage points) and projected to remain so over the forecast horizon. However, given upside risks to inflation from rising global commodity prices, the authorities should maintain a data-dependent approach to monetary policy to keep inflation expectations well-anchored.

What is the IMF’s scenario for the developing countries and emerging markets if they cannot reach their vaccination targets by the end of 2021?

We do not assume that the emerging markets and developing economies will all reach their vaccination targets by the end of 2021. Instead, our baseline assumes broad vaccine availability in all advanced economies and some emerging market economies by the end of 2021, and across most countries by the second half of 2022.

Some low-income countries may not obtain broad coverage until 2023. Vaccine rollout speed is assumed to vary across economies based on country-specific factors. However, roadblocks in the global distribution of vaccines to low-income countries could delay broad vaccine coverage of the world population and represent a downside risk to our outlook, in particular if this were to coincide with the emergence of more transmissible, deadlier virus variants.

*A version of this article appears in print in the 14 October, 2021 edition of Al-Ahram Weekly


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