Inflation risks weigh on energy transition needs

Developing economies face the longest path to restarting growth in the wake of the Covid-19 pandemic because of their lack of access to vaccines — and an IMF outlook highlights inflation risks that could make that economic recovery and energy transition even more difficult.

The IMF's latest update of its World Economic Outlook projects global economic growth at 5.9pc this year, a 0.1 percentage point drop from its previous edition released in July. The downgrade reflects supply chain disruptions that negatively affect recovery in the advanced economies, while a lack of access to Covid-19 vaccines is holding back prospects for emerging economies. "Pandemic outbreaks in critical links of global supply chains have resulted in longer than expected supply disruptions, feeding inflation in many countries," IMF director of research Gita Gopinath says.

The IMF has downgraded US GDP growth by one percentage point to 6pc this year, citing supply disruptions and lower than expected consumer spending in the third quarter. The IMF's outlook slightly lowers China's GDP growth forecast to 8pc this year. The current outlook reflects data available as of late September, so it may not fully reflect the cooling expansion in China, where power rationing and high energy prices in recent weeks have hit heavy industry and the service sector.

The rise in inflation rates in the US and other advanced economies is prompting the IMF to highlight potential risks to global growth, should the increase in prices prove to be less transitory than most economists expect. Of particular concern are inflation risks in the US, the IMF notes, owing to the oversized influence of the US dollar on the global economy. A 0.5 percentage point uptick in US inflation expectations could shave 1.25pc off global growth by 2025, with stronger effects in emerging economies, according to a downside scenario in the IMF's outlook.

The IMF's outlook highlights a two-speed global economic recovery, reflecting what it terms a "great vaccine divide" — emerging markets and developing economies, with the exception of China, in 2024 will be 5.5pc smaller than they would have been if their pre-pandemic growth trend held. In contrast, the advanced economies group will return to its pre-pandemic growth trend next year and exceed it by 0.9pc in 2024. Emerging economies tend to be more energy-intensive than their richer peers and face higher hurdles in achieving decarbonisation.

Trillions, not billions

Getting the world on track to meeting Paris climate goals requires clean energy investment to more than triple to $4 trillion/yr by 2030, the IEA estimates, with 70pc of that amount required in emerging and developing economies. But "financing is scarce and capital remains up to seven times more expensive than in advanced economies", the IEA notes in its World Energy Outlook 2021 report. The G7 is proposing to meet the large gap between the required and available capital with a combination of foreign aid commitment — the US is pledging to provide $11bn/yr toward the Paris climate funding goal of $100bn/yr — and development finance.

But the latter approach is implicitly based on an assumption of a low interest rate environment, which will be tested in the near future. And "$100bn is a rounding error compared with the climate finance we'll need", Columbia University Center on Global Energy Policy director Jason Bordoff told the Energy Intelligence Forum this month. US treasury secretary Janet Yellen lauds the Glasgow Financial Network for Net-zero of financial institutions that collectively manage almost $100 trillion in assets and are pledging to make those portfolios carbon neutral by 2050. "The question remains, however: Will enough investment opportunities materialise to absorb all this capital?" Yellen says.

By Haik Gugarats