Economic stimulus policy faces “dilemma”

Governments of many countries have implemented and planned large stimulus packages in order to recover the economy after the long period of misery caused by the COVID-19 pandemic. However, in the context of rising inflation, the International Monetary Fund (IMF) has just warned that the Omicron variant can slow down the global economic growth while the economic stimulus policy of the US and many other countries are in a “dilemma”.

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The world economy has gone through “multiple stages” in the past two years along with unpredictable developments of the COVID-19 pandemic. Prior to the appearance of the Omicron variant, the world economy witnessed a spectacular transformation compared to the 3-5% decrease in 2020. Accordingly, confidence in a brighter future for economies has increased. The effectiveness of economic stimulus packages along with the gradual control of the pandemic of many countries and the implementation of the strategy of “living with COVID-19” created a push to help the global economy gain growth momentum.

According to IHS Markit, the world's real GDP in the second quarter of 2021 exceeded that of the fourth quarter of 2019 - the pre-pandemic period - marking the transition from recovery to growth. The IMF and the World Bank (WB) have recently also made an optimistic assessment of the global economic outlook as these two financial institutions both raised their forecast for world economic growth and assessed that the world economy will recover from the recession at “the fastest pace in 80 years”.

However, the joy is short-lived, the appearance of the Omicron variant in the last quarter of 2021 has poured cold water on the hopes for a strong recovery of the world economy and pushed governments into difficulty in implementing economic stimulus packages.

IMF Managing Director Kristalina Georgieva said that the new Omicron variant of the SARS-CoV-2 virus could slow the recovery of the global economy, like the impact of the Delta variant. In its latest World Economic Outlook, the IMF forecast global economic growth to reach 5.9% this year and 4.9% in 2022. However, according to Georgieva, the sharp downward revision of growth forecasts by the US and other major economies after the spread of the Delta variant will affect global growth forecasts. The appearance of the Omicron variant makes the situation even bleaker.

In recent days, the new Omicron variant of the SARS-CoV-2 virus, which is considered faster and more dangerous has forced many countries to re-establish strict control measures. In China, many international ports and border gates have narrowed or even halted their operations. Meanwhile, demand for goods for production and consumption is growing strongly in most economies. Limited and broken supply chains have increased shortages of consumer goods and shortages of important input materials for production such as semiconductor devices, leading to high prices and inflation.

A few months ago, officials from the IMF and the US Federal Reserve System (FED) both said that inflation is temporary and will not be galloping. However, financial institutions last week acknowledged that the risk of inflation is not only short-term. According to the survey results of 46 economies published by Pew Research Centre in November, up to 39 economies recorded an increase in inflation in the third quarter of 2021 compared to the same period in 2019, of which the US and 18 other economies have seen the inflation index increase by 2 percentage points.

The latest data released by the US Bureau of Labour Statistics in early December showed that commodity prices in the US increased by 6.8% in 2021, the highest level since 1982. Inflation rate in other EU countries is also at a historic level of more than 4%, the highest in the last decade.

High inflation is putting governments in a difficult position. Without stimulating demand, it is difficult for the economy to recover quickly, but if large economic stimulus packages are deployed, it will increase inflation. Inflation has also forced the US and many other countries to adjust financial policies towards increased control.

It can be said that, after the appearance of the Delta variant, the Omicron variant is another misfortune to the global economy. Currently, most financial institutions and experts share the same opinion that this variant may slow down the recovery of the global economy this year and continue to pose risks to the world economy in 2022. In the immediate future, the fact that countries are forced to implement restrictive measures to prevent the pandemic and the congested transport network will cause disruptions to the supply chain and difficulties to the world economy.

But the bigger problem is that rising inflation is forcing governments of countries to delay the deployment of economic stimulus packages. Once there is a lack of a “tonic” from trillion-dollar stimulus packages, it is very difficult for the world economy to get out of the current “recession quagmire”.