European supply constraints could last into 2023, IMF warns

WASHINGTON: Supply constraints that held back growth in Europe last year by an amount equal to some countries' normal rates of expansion could last into 2023, the IMF warned Thursday.

Without these constraints that included factory closures and component shortages, growth last year would have been about two percentage points higher, the Washington-based crisis lender said in a blog.

That is equivalent "to about one year's worth of growth in normal pre-pandemic times for many European economies," it said.

While forecasts were for the constraints to ease this year, the fast-spreading Omicron variant of the virus "has injected new uncertainty," managing director Kristalina Georgieva and other officials wrote.

"Europe and China have imposed new restrictions and more disruptions could follow. All in all, supply disruptions could last for longer, possibly into 2023," they said.

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Manufacturing output in the euro area would have also been six percent higher without the supply troubles.

The report attributed 40 percent of the supply shocks to shutdowns caused by the pandemic, which it said should be transient.

It warned labor shortages and worn-out infrastructure "could however have more persistent effects on supply and inflation than shutdowns."

Countries whose factories rely the most on global supply chains were hit hardest, with the IMF saying Germany and the Czech Republic would have seen output 14 percent higher.

The lender called for tackling "supply bottlenecks directly with regulatory measures wherever possible," including expanding operating hours at ports, speeding up licenses required for transportation and logistics operations and promoting immigration to address shortage of workers.

The blog also said spending measures could be used to help the situation but "support should... be well targeted," and warned against broad policies that could drive up demand and make bottlenecks and inflation worse.

"The more successful regulatory and targeted fiscal measures are in alleviating the supply bottlenecks, the less likely it is that policymakers will be forced to dampen down aggregate demand and economic growth to contain inflation," the officials wrote.