Economic recovery 'like no other': IMF

Colin Brinsden, AAP Economics and Business CorrespondentAAP
The IMF expects global economic growth to fall from 5.9 per cent in 2021 to 4.4 per cent in 2022.
Camera IconThe IMF expects global economic growth to fall from 5.9 per cent in 2021 to 4.4 per cent in 2022. Credit: EPA

The spread of the Omicron variant has meant the global economy has entered 2022 in a weaker position than previously expected, while facing multiple challenges, the International Monetary Fund has warned.

Entering the third year of the pandemic, the IMF in an update of its October World Economic Outlook says rising energy prices and supply disruptions have also resulted in higher and more broad-based inflation than anticipated.

"The last two years reaffirm that this crisis and the ongoing recovery is like no other," IMF's first deputy managing director and former chief economist Gita Gopinath says.

"Policymakers must vigilantly monitor a broad swathe of incoming economic data, prepare for contingencies, and be ready to communicate and execute policy changes at short notice."

The IMF now expects global economic growth to moderate from 5.9 per cent in 2021 to 4.4 per cent in 2022 - half a percentage point lower than had been predicted in October.

It believes risks to the global outlook are tilted to the downside with the possible emergence of further new COVID-19 variants that could prolong the pandemic and induce renewed economic disruptions.

There is also uncertainty about the inflation outlook due to the supply chain disruptions, energy price volatility and localised wage pressures.

"Monetary policy is at a critical juncture in most countries," Dr Gopinath says.

"Economies will need to adapt to a global environment of higher interest rates."

She said where inflation is broad based alongside a strong recovery, or high inflation runs the risk of becoming entrenched, "extraordinary" monetary policy support should be withdrawn.

"Several central banks have already begun raising interest rates to get ahead of price pressures," she said.

"It is key to communicate well the policy transition towards a tightening stance to ensure orderly market reaction."

However, she said where core inflationary pressures remain subdued, and recoveries incomplete, monetary policy can remain accommodative.

The IMF's interest rate guidance came as Australia reported its strongest underlying inflation rate since 2014 at 2.6 per cent.

The annual consumer price index for the December quarter was also higher than expected at 3.5 per cent and above the Reserve Bank of Australia's two to three per cent inflation target.

As such, economists expect the RBA could start lifting the cash rate from a record low 0.1 per cent this year and much earlier than the central bank had been predicting.

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