With inflation easing, growth holding steady and the effects of the COVID-19 pandemic fading, the International Monetary Fund said it can foresee a softer landing for the global economy than economists recently feared.
But the rosier than expected forecast on Tuesday was tempered by disruptions in the global supply chain, especially in the Middle East, and the possibility that core inflation could be more persistent than predicted.
The IMF’s latest World Economic Outlook update projects global growth at 3.1% this year and 3.2% in 2025. The 2024 forecast is 0.2% higher than in October due to strength in the U.S. economy and several large emerging markets and developing economies, along with fiscal support in China.
Still, the IMF forecast for 2024 to 2025 remains below the historical (2000 to 2019) average of 3.8%, as interest rates are expected to remain higher and government spending to stay lower because of debt burdens.
'Clouds are beginning to part'
Global headline inflation – which measures total inflation in an economy, including volatile food and energy prices – is expected to fall to 5.8% in 2024 and to 4.4% in 2025.
“The clouds are beginning to part,” says IMF economist Pierre-Olivier Gourinchas. “The global economy begins the final descent toward a soft landing, with inflation declining steadily and growth holding up.”
Still, he cautions, the pace of expansion remains slow, and “turbulence may lie ahead.”
The IMF warns of significant risks on the horizon that could torpedo the improving global economy: wars and conflicts, continued weakness in China’s real estate market, stubborn inflation, plus tax hikes and government spending cuts.
Gourinchas expects slower growth in the U.S., as interest rates remain high to fight inflation, and in China, where weaker consumer consumption and investment continue to slow the economy.
The IMF sees a rebound in the eurozone after last year’s high energy prices and tight monetary policy dampened demand. Many emerging economies are showing resilience, with growth accelerating in Brazil, India and Southeast Asia’s major economies.
Russia's economy remains healthy
The economy of Russia, which the West tried to cripple after its invasion of Ukraine, is showing surprising resilience and is expected to grow by 2.6% this year.
Aside from Argentina, inflation is generally trending lower. In advanced economies, which have the tools and resources to control monetary policies, the IMF says inflation is expected to average around 2.6% in 2024, close to the targets set by central banks.
“With inflation receding and growth remaining steady, it is now time to take stock and look ahead,” Gourinchas says. Much of the disinflation was the result of lower commodity and energy prices, not from a contraction of economic activity.
The aggressive stance taken by central banks to reign in inflation, Gourinchas says, “helped convince people and companies that high inflation would not be allowed to take hold.” This, he says, “prevented inflation expectations from persistently rising, helped dampen wage growth, and reduced the risk of a wage-price spiral.”
The “unusually synchronized nature” of the tightening also lowered energy demand and put the brakes on inflation, he said.
Central banks, the IMF says, must now fend off pressures to prematurely declare victory over inflation, ease rates too quickly and risk undoing many hard-earned gains and rekindling inflation.
