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Client Update - 15th October 2021

The development and mass production of vaccines in 2020 has allowed the world to return to some semblance of normal, with some pretty serious hangovers remaining. I have written at length about supply side shortages and the effect on inflation, which is proving stickier than many expected.


Whilst not all of the global population has embraced these vaccines, the development has undoubtedly been a relief, and has brought with it plenty of good news, but also new challenges and these have been summarised in the latest global economic outlook from the International Monetary Fund (IMF). Unsurprisingly, the report focusses on pandemic outbreaks in critical links of the global supply chain that have evidently resulted in longer than expected supply chain disruption. This has led to a dangerous divergence in economic prospects across countries and this continues to develop into a major concern.


Aggregate output for the advanced economy group is expected to regain its pre-pandemic trend path in 2022 and exceed it by 0.9 percent in 2024. By contrast, aggregate output for the emerging market and developing economy group (excluding China) is expected to remain 5.5 percent below the pre-pandemic forecast in 2024, resulting in a larger setback to improvements in their living standards.


These divergences are a consequence of the “great vaccine divide” and large disparities in policy support. While almost 60 percent of the population in advanced economies are fully vaccinated and some are now receiving booster shots, about 96 percent of the population in low-income countries remain unvaccinated. Furthermore, many emerging market and developing economies, faced with tighter financing conditions and a greater risk of de-anchoring inflation expectations, are withdrawing policy support more quickly despite larger shortfalls in output.


Supply disruptions pose another policy challenge. On the one hand, pandemic outbreaks and climate disruptions have resulted in shortages of key inputs and lowered manufacturing activity in several countries. On the other hand, these supply shortages, alongside the release of pent-up demand and the rebound in commodity prices, have caused consumer price inflation to increase rapidly in, for example, the United States, Germany, and many emerging market and developing economies. Food prices have increased the most in low-income countries where food insecurity is most acute, adding to the burdens of poorer households and raising the risk of social unrest.


A principal common factor behind these complex challenges is the continued grip of the pandemic on global society. The IMF set out that the foremost policy priority is therefore to vaccinate at least 40 percent of the population in every country by end-2021 and 70 percent by mid-2022. This will require high-income countries to fulfil existing vaccine dose donation pledges, coordinate with manufacturers to prioritise deliveries to COVAX in the near-term and remove trade restrictions on the flow of vaccines and their inputs.


Away from COVID, another urgent global priority is the need to slow the rise in global temperatures and contain the growing adverse effects of climate change. This will require more ambitious commitments to reduce greenhouse gas emissions at the upcoming United Nations Climate Change Conference (COP26). A policy strategy that includes an international carbon price floor adjusted to country circumstances, a green public investment and research subsidy push, and compensatory, targeted transfers to certain households can help advance the energy transition in an equitable way. Just as importantly, advanced countries need to deliver on their earlier promises of mobilizing $100 billion of annual climate financing for developing countries.


Monetary policy will need to walk a fine line between tackling inflation and financial risks and supporting the economic recovery. The IMF project, amidst high uncertainty, that headline inflation will likely return to pre-pandemic levels by mid-2022 for the group of advanced economies and emerging and developing economies. There is, however, considerable variance across countries with upside risks for some, like the United States, United Kingdom, and some emerging market and developing economies. While monetary policy can generally look through transitory increases in inflation, the IMF advised that central banks should be prepared to act quickly if the risks of rising inflation expectations become more material in this uncharted recovery. Central banks should chart contingent actions, announce clear triggers, and act in line with that communication.


More generally, clarity and consistent actions can go a long way toward avoiding unnecessary policy accidents that disturb financial markets and set back the global recovery—ranging from a failure to lift the US debt ceiling in a timely fashion to disorderly debt restructurings in China’s property sector to escalating cross-border trade and technology tensions.


Recent developments have made it abundantly clear that we are all in this together and the pandemic is not over anywhere until it is over everywhere. If COVID-19 were to have a prolonged impact—into the medium-term—it could reduce global GDP by a cumulative $5.3 trillion over the next five years relative to the IMF’s current projection. It does not have to be this way. The global community must step up efforts to ensure equitable vaccine access for every country, overcome vaccine hesitancy where there is adequate supply, and secure better economic prospects for all.

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