Delta variant risk clouds global outlook
The upsurge of COVID-19 virus infection rates, driven by the fast-spreading Delta variant is rapidly becoming dominant across countries all over the globe. Parts of the global economy are expected to experience an increase in their growth rates over the coming months and start to catch up with the U.S. and China, though potential headwinds loom, emanating from the spread of the ‘new variant’. While experts don't expect a return to 2020-style lockdowns, some economies, especially around Europe, and those with low vaccination rates in developing economies are being forced to consider possibilities of re-imposing restrictions to contain the spread of the virus.
In its latest World Economic Outlook (WEO), the IMF indicated, although global recovery is still in sight, it is “not assured even in countries where infections are currently very low so long as the virus circulates elsewhere.” Thus, regards the virus spread, a recent survey was carried out by Ipsos and the World Economic Forum, between 25th June and 9th July 2021. Altogether, more than 21,500 people were interviewed in 29 countries (developed and emerging markets) on their views of post-pandemic economic life. About 56 per cent of Chinese respondents said things were already back to where they should be.
That number increased to 83 per cent when those who think the recovery will have happened ECONOMIC PROSPECTS DIVERSE ACROSS COUNTRIES within a year are factored in. In Saudi Arabia, a majority of people (63%) think the recovery will have happened in a year’s time. Also, 25% said the economy has already recovered. Albeit, considering the only sub-Saharan African country featured in the survey, South Africa, only 2 per cent of respondents held the view that things were already back to where they should be, while 62 per cent think that it will take the economy more than three years to recover from the pandemic, indicating less optimism of the recovery.
ECONOMIC PROSPECTS DIVERSE ACROSS COUNTRIES
Based on its projections, the IMF stayed global economic growth at 6.0 per cent in 2021 and 4.9 per cent in 2022. The main thrust of the projections hinged on the fact that, “vaccine access has emerged as the principal fault line along which the global recovery splits into two blocs: those that can look forward to further normalization of activity later this year (almost all advanced economies) and those that will still face resurgent infections and rising COVID death tolls.” Given the growth prospects for emerging market and developing economies, the IMF revised April 2021 forecasts downwards for 2021, especially for Emerging Asia.
By contrast, the forecast for advanced economies was revised up. Meanwhile, these revisions reflect pandemic developments and changes in policy support. According to the IMF, the United States is projected to grow by 7.0 per cent in 2021 and 4.9 per cent in 2022, the United Kingdom comes close to the US, projected to grow by 7.0 per cent and 4.8 per cent in 2022. Meanwhile, Japan is expected to grow by 2.8 per cent in 2021 to 3.0 per cent in 2022. Similarly, Fitch Solutions forecasts United States real GDP growth at 6.2 per cent in 2021 and slow down to 3.7 per cent in 2022.
Also, the Eurozone, in general is projected to grow by 4.5 per cent in 2021 and 4.1 per cent in 2022 whereas Japan is expected to grow by 2.5 per cent in 2021 and 2.1 per cent in 2022. Among the emerging economies, China is expected to expand to 8.0 per cent in 2021 and 5.7 per cent in 2022 whereas India is projected to expand the largest to 9.0 per cent in 2021 and 8.5 percent in 2022. For developing economies, the growth forecast for sub-Saharan Africa is 3.4 per cent in 2021 and 4.1 per cent in 2022. Nigeria, on the one hand is forecasted to grow by 2.5 per cent and 2.6 per cent in 2021 and 2022 respectively. Also, South Africa is projected to grow by 4.0 per cent and 2.2 per cent in 2022 respectively.
Based on Fitch Solutions forecasts, Kenya’s growth for 2021 is pegged at 4.1 per cent and 5.2 per cent in 2022, whereas 2.0 per cent and 6.3 per cent in 2022 for growth in Ethiopia. Following similar sentiments, economists at Oxford Economics lowered their GDP growth forecast slightly from 6.4 per cent to 6.2 per cent in 2021, indicating that the spread of the Delta coronavirus variant remains a downside risk to the forecast and less of a reason to make major adjustments to the global baseline forecast, they asserted.
“The key near-term uncertainty is whether the spread of the Delta coronavirus variant will trigger another global surge in COVID cases, prompting delays or the re-imposition of restrictions. “…cases are on the rise in highly-vaccinated economies, such as the UK and Israel, where the Delta variant is now the dominant strain. However, vaccines have significantly softened the link between cases and hospitalizations, implying the surge in cases is less of a worry than in the past.”
INFLATIONARY PRESSURES REMAIN BENIGN FOR THE MOST PART, BUT COULD RESURFACE
Recent price pressures appear to have glided, remaining subdued for some time, although still elevated in some economies due to supply-side constraints. Particularly, advanced economies such as the United States which recently experienced rising core inflation— excluding energy and food prices— however remains contained for the most part. Evidence in some emerging markets, developing economies in sub-Saharan Africa, the Middle East and Central Asia suggest that food prices have increased significantly due to shortages.
Also, contributing to these threats is currency depreciation, which has also lifted prices of imported goods, further adding to overall inflation in these economies. “Supply-chain bottlenecks and pandemic-related shortages continue to cause problems for certain sectors. In addition to denting output in some sectors, such as motor vehicle production, it has also promoted us to raise our CPI inflation forecasts for 2021 and 2022 slightly to 3.9 per cent and 3.2 per cent respectively up from 3.7 per cent and 3.1 per cent a month ago,” economists at Oxford Economics suggest.
Moreover, latest survey from IHS Markit indicates that supply chain delays and capacity constraints across the global economy worsened in July 2021, which could ultimately serve as a cap for economic momentum over the coming months. However, should inflation expectations rise, the IMF is of the view that the recent price pressures may become persistent.
Albeit, with the current inflation outlook, “the rising price pressures should subside to its pre-pandemic ranges in 2022 once the transitory disturbances work their way through prices. “This judgment rests on three pillars: even with diminished participation rates, labor market slack remains substantial (albeit with reported shortages and hiring difficulties in sectors such as hospitality and travel); inflation expectations are well anchored; and structural factors that have lowered the sensitivity of prices to changes in slack are still expected to operate as before.”
Nonetheless, going into 2022, inflation is expected to remain elevated in some emerging market and developing economies, emanating partly from continued food price pressures and pass through effects that lag due to higher oil prices for importers.
GLOBAL OUTLOOK HANGS ON DOWNSIDE RISKS
Uncertainties continue to shroud the global forecasts, which is primarily tied to the prospects of emerging market and developing economies. Although global growth could potentially turn out stronger than projected, downside risks remain elevated in the near term. Two key areas could pose these risks, according to Fitch Solutions. First, the number of infections are on the ascendancy globally, particularly of the Delta variant, and second, high frequency data are easing already, Fitch Solutions suggests.
Evidently, rising case counts of the Delta variant pose a downside risk to growth, especially for countries with low vaccination rates. Meanwhile, initial data suggest that despite a sharp rise in the number of cases in the UK, for instance, the case fatality rate remains low. The case fatality rate also remains low in regions such as North America and Europe, where vaccination rates are higher than their emerging market counterparts.
However, in Asia, South America and Africa, where vaccination rates remain low, the mortality rate continues unabated and as long as economies— predominantly emerging markets— suffer from a lack of access to vaccines, they will remain exposed to downside risks to growth, Fitch Solutions argues. According to the IMF, the downside risks may portend a weaker growth outlook than projected “if logistical hurdles in promoting and distributing vaccines in emerging market and developing economies lead to an even slower pace of vaccination than assumed.”
Inadvertently, such delays would serve as avenues for the spread of new variants, with possibly may lead to higher risks of infections among vaccinated populations.
STAYING THE COURSE
The current trend regards monetary policy shows that most policy makers are not in any hurry to change rates before year’s end. The IMF posits that major central banks are assumed to leave policy rates unchanged throughout the forecast horizon. The US Fed is expected to begin its tapering of bond purchases in early 2022, and may provide further clarity on what that will look like in a few weeks ahead.
The European Central Bank, on the other hand, may move in the other direction. A recent change to its announcements flagged greater tolerance for inflation, opening the possibility of ramping up asset purchases. In China, the central bank has already moved to head off a slowdown in growth by freeing up more funds for banks to lend. It’s possible the delta variant outbreak could force it to do more. For some emerging markets, a faster than expected recovery in activity, driven by significant fiscal stimulus, has already pushed a number of central banks to begin normalizing policy. For instance, Russia and Brazil have already started hiking rates. Likewise, some central banks in SSA are keeping policy rates unchanged such as Ghana and Nigeria. Following this, the IMF advises that central banks should be cautious in their policy responses. Specifically, central banks should generally look through transitory inflation and avoid tightening until there is more clarity on underlying price dynamics. Nonetheless, there are risks showing that transitory pressures could become persistent. The Fund further states that should that happen, central banks may have to consider taking preemptive actions. “In an unprecedented recovery of this kind, there is an even greater premium on clear communication from central banks on the outlook for monetary policy. Where the recovery is underway and vaccination is advanced, central banks can begin telegraphing their exit from extraordinary monetary support,” IMF.