As the global economy gains momentum, vigilance is needed
The global economy is recovering rapidly in 2021, supported by the accommodative fiscal and monetary policy instruments which are still in place as well as significant vaccination progress in many countries. However, this recovery is uneven – the gap between developed and developing countries continues to widen. Looking ahead, the growth outlook is favourable, although there are some risks. Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania, will cover these developments at the remote annual meetings of the International Monetary Fund (IMF) and the World Bank.
“The recent IMF projections are positive: after the last year’s pandemic shock, we are witnessing a rapid global economic recovery which is expected to continue in the next year. IMF experts predict that developed countries will return to the pre-crisis growth trajectory already next year. So far, the strategy of large-scale policy support has been successful, but we cannot keep pushing the accelerator pedal all the way down this road. We now have to start thinking about the normalisation of policies and a gradual return to fiscal discipline,” says Mr. Šimkus.
According to him, stepping away from the pandemic regime, the attention should be focused on addressing structural problems and on the green and digital transformation of the economy. Such measures would help ensure a long-term and sustainable economic growth, alleviating the debt burden that has increased over the last few years.
In its economic outlook update, the IMF predicts a global GDP growth of 5.9% this year and of 4.9% in 2022. Compared with April, this year’s GDP forecast has slightly been revised downwards (by 0.1 percentage point). Economic growth has been dampened by supply chain disruptions in developed countries and by a difficult pandemic situation in developing countries. The IMF highlights the extreme differences in vaccination rates: although around 70% of the population has received at least one vaccine dose in developed countries, this figure is less than 10% in low-income countries.
The IMF projects the growth of 4.7% for Lithuania this year and 4.1% next year. The future of Lithuania’s main trade partners is also considered to be favourable. Compared to April, the euro area growth forecast was improved by 0.6 percentage point for this year and by 0.5 percentage point for the next year, to 5.0% and 4.3%, respectively.
According to Gediminas Šimkus, Lithuania demonstrates strong growth both at the regional and at the European level. Still, in his opinion, it is currently necessary to closely monitor and assess the economic developments and to adjust policy measures, if needed, so that the growth of individual sectors or even the whole economy does not exceed safe speed. For example, at the end of September, the Bank of Lithuania launched consultations on the application of additional macro-prudential measures to the real estate market to ensure its sustainable development.
The Fund emphasises that inflation has been growing slightly faster than expected recently, however, the situation should stabilise next year. A temporary acceleration of price growth was driven by a rise in commodity prices and supply chain disruptions, which resulted in the discrepancies between aggregate supply and demand.
Looking forward, it should be noted that the main risks to growth are related to the further course of the pandemic and the potential emergence of new variants of the virus before reaching a sufficient level of vaccination globally. The growth may also be negatively affected by a slower than expected normalisation of supply chains, which could add to inflation pressures. Finally, geopolitical tensions, especially between the US and China, may slow down investment and international trade.
The Fund also notes significant climate-related risks and prompts countries to take resolute measures as soon as possible to reduce greenhouse gas emissions, since the current commitments are insufficient to ensure that climate warming does not exceed 2o C. The Fund also stresses the importance of international cooperation in ensuring a global coordinated response to climate change risks.