Worldwide supply chain disruptions are driving price increases and draining momentum out of economies recovering from the Covid-19 pandemic, the IMF warned on Tuesday.

The ongoing hit from the pandemic and the failure to distribute vaccines worldwide is worsening the economic divide and darkening prospects for developing nations, the IMF said in its latest World Economic Outlook.

The global economy is expected to grow 5.9 percent this year, only slightly lower than projected in July, before slowing to 4.9 percent in 2022, the report said.

But the overall figures mask large downgrades and ongoing struggles for some countries, including the United States, Germany and Japan that are feeling the impact of supply bottlenecks, IMF chief economist Gita Gopinath said.

IMF Growth forecast
Updated IMF economic growth forecasts by world region and selected countries. Photo: AFP / Erin CONROY

"This recovery is really quite unique," she told AFP on the sidelines of the annual meetings of the International Monetary Fund and World Bank.

Despite a strong return in demand, "the supply side has not been able to come back as quickly," hampered in part by the spread of the Delta variant of Covid-19, which has made workers reluctant to return to their jobs.

Those labor shortages are "feeding into price pressures" in major economies, she said, slowing growth expectations this year.

Energy prices have hit multi-year highs in recent days, with oil above $80 a barrel, weighing on households.

But Gopinath said she expects energy prices to begin to retreat by the end of the first quarter of 2022.

IMF
The IMF said the key policy priority for restoring economic growth must be to ensure Covid-19 vaccines are deployed worldwide Photo: AFP / MANDEL NGAN

In low-income developing countries, the outlook "has darkened considerably due to worsening pandemic dynamics," she said in a blog post on the new forecasts.

The setbacks, which she blamed on the "great vaccine divide," will impact the restoration of living standards, and a prolonged pandemic downturn "could reduce global GDP by a cumulative $5.3 trillion over the next five years," she warned.

"The dangerous divergence in economic prospects across countries remains a major concern," Gopinath said.

IMF chief economist Gita Gopinath
IMF chief economist Gita Gopinath speaks during an interview with AFP, where she said energy prices should begin to retreat early next year Photo: AFP / PEDRO UGARTE

Advanced economies are expected to regain "pre-pandemic trend path in 2022 and exceed it by 0.9 percent in 2024," she said.

However, in emerging market and developing economies, excluding China, output "is expected to remain 5.5 percent below the pre-pandemic forecast in 2024."

Amid the danger of long-term scarring, "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," she said.

The world's largest economy has benefitted from massive fiscal stimulus, but the Delta wave and the supply issues have undermined progress, prompting the IMF to slash the US growth forecast for this year to six percent, a full percentage point off the July figure.

US growth is expected to slow to 5.2 percent next year, slightly faster than previously expected, but policymakers will face a delicate balancing act amid risks of rising inflation and lagging employment, the fund noted.

Wages also threaten to rise as employers compete for scarce workers, Gopinath noted.

While inflation is expected to return to "more normal levels" by mid-2022 in most countries, it could take longer in the United States, she told reporters.

"There is tremendous uncertainty, we have never seen a recovery of this kind," she said, noting labor shortages plaguing employers even amid high unemployment, and supply unable to meet demand.

US consumer prices rose 5.3 percent annually in August, more than double the Federal Reserve's two-percent goal. Markets on Wednesday will be watching for the government's September inflation report.

US Treasury Secretary Janet Yellen said she believes the price increases will be "transitory."

"But I don't mean to suggest that these pressures will disappear in the next month or two," she told CBS News. "This is an unprecedented shock to the global economy."

However, if higher inflation becomes entrenched, it could force central banks to respond aggressively, and rising interest rates would slow the recovery, the IMF cautioned.

Copyright AFP. All rights reserved.