The meaning of the International Monetary Fund's latest outlook update

The International Monetary Fund's January 2022 update compared to a consensus view once again dampens optimism and forces us to give a chance to what we normally handle as a stressed scenario in terms of aggregate growth, not only due to the collection of risks that skew the downward vision, but also because of an expected slow return to normality accompanied by epidemiological shocks that will continue well into 2023.

The agency's new scenario predicts global growth of 4.4% in 2022, half a percentage point lower than forecasts issued in October. It expects 3.8% for 2023, up 0.2 percentage points. This upturn will be accompanied by the disappearance of factors inducing lower growth in the second half of 2022 and is a consequence of the normalization of the pandemic situation.

The bulk of the correction occurs in developed economies and, fundamentally, in the US, where growth went from 5.2% in 2022 and 2.2% in 2023 to 4.0% and 2.6%, respectively. In emerging economies, an average growth rate of around 4.8% is expected over the next two years, which means that the contribution to global growth will be lower than in previous years.

In terms of the behavioral pathways of the International Monetary Fund's new scenario, we can draw a number of conclusions. On the one hand, as the new Omicron variant advances, countries have reinstated mobility restrictions and this makes us rule out an impact on activity. In turn, there is slower growth in the two largest economies, the US and China. As a third conclusion, I would add that, in the case of the United States, the anticipated withdrawal of accommodative monetary policy and continued supply disruptions are the main factors that have generated a 1.2-percentage-point downward revision in growth expectations. In the case of China, pandemic-induced disruptions in the context of a COVID-19 zero-tolerance policy and prolonged financial stress among developers resulted in a 0.8 percentage point cut in projections.

On the other hand, inflation is higher and more widespread than expected, especially in the United States and in many emerging market and developing economies. Indeed, high inflation is expected to continue for longer than foreseen in October, and supply chain disruptions and high energy prices are predicted to persist into 2022. An average rate of 3.9% is expected in advanced economies in 2022 and 5.9% in emerging and developing markets.

In this sense, the inflationary scenario is more similar from a conceptual point of view to the one I envisage in a stressed scenario. In fact, it is close to our estimates. For us, this stressed scenario has a greater impact on economic activity since, although restrictions are not at the same level as at the beginning of the pandemic, the situation is substantially worse either because of ineffective vaccines or saturated health systems (due to severity or transmissibility), and because the spread of the virus leads to the reinstatement of more severe and prolonged measures that have an impact on activity. This implies a delayed return to normality, with epidemiological shocks continuing well into 2023, although progressively less damaging economic measures are involved. Relevantly, in this scenario, the impact of supply chains becomes more adverse, with disruptions spreading to a wider range of goods and services, driving inflation upwards until the end of 2022.

In the International Monetary Fund's baseline scenario, they give less weight to geopolitical factors in energy prices, with a relevant upturn followed by a decrease in 2023 as supply-demand imbalances are corrected. In its stressed scenario, however, it highlights the emergence of new variants of the virus, while supply chain disruptions intensify, energy price volatility and specific wage pressures generate greater uncertainty around the trajectory of inflation and policies. This would further boost monetary policy rates in advanced economies, potentially posing risks to financial stability, as well as to capital flows, currencies, and the fiscal position of emerging market economies. Furthermore, it would lead to greater financial fragility due to significant increases in debt levels in the last two years.