On Tuesday, the International Monetary Fund (IMF) expressed optimism for a "soft-landing" of the global economy. It boosted its growth projection for the current year, crediting the economic resilience seen in the United States and numerous large emerging market economies, coupled with China's fiscal support.
The IMF now forecasts global economic growth of 3.1% for this year, in line with its 2023 estimates, and a bump from its October forecast of a 2.9% expansion. As per the January update of its World Economic Outlook report, the IMF has maintained its 2025 growth prediction at 3.2%.
However, forecasts for 2024 and 2025 remain below the historical average for 2000-2019, which stands at 3.8%. The IMF sees decreased chances of a "hard-landing" for the global economy, and anticipates a "soft-landing" instead, albeit acknowledging the possible risks. Global headline inflation is estimated to match the 2023 figure of 5.8% for this year, while next year's outlook has been revised downwards by 0.2 percentage points to 4.4%.
IMF's Economic Counselor and Director of Research, Pierre-Olivier Gourinchas, referred to the global economy's "final descent toward a soft landing". He noted the gradual decline of inflation and the retention of growth, but also cautioned against potential economic turbulence. Gourinchas highlighted that if labor market tightness eases further and near-term inflation expectations decrease, disinflation could happen more quickly than expected, leading central banks to instigate earlier easing measures.
On the other hand, Gourinchas believes that markets are overly optimistic about the chances of early rate cuts. If investors reassess their views, this could lead to a rise in long-term interest rates and pressure governments to hasten fiscal consolidation, subsequently impacting economic growth negatively.
Among advanced economies, the updated World Economic Outlook report shows an expected slight decline in growth this year, followed by improvement in 2024, taking into account an anticipated recovery in the Eurozone and moderated growth in the United States. The report also made amendments to growth forecasts for various countries, including upgrades for the U.S. and cuts for the Eurozone.
Growth forecasts for emerging and developing economies, particularly China, India, and Russia, were also adjusted in the report. Contributing factors include increased government spending in China, and strong domestic demand in India. The IMF, however, lowered its world trade growth outlook for this year and next, citing rising trade distortions and geo-economic fragmentation as potential disruptors to global trade.
Title: Interest Rates Expected to Remain Unchanged Until H2 2024
The Federal Reserve, the European Central Bank, and the Bank of England are predicted to maintain their current financial rates until the latter half of 2024. This presumption arises from the International Monetary Fund's (IMF) prediction that these major banks will begin financial easing once inflation nears their predetermined aims. Furthermore, the Bank of Japan's economic approach is expected to remain generally supportive, according to the same report.
In addition to this, the IMF report highlighted the potential for future supply and commodity disturbances due to resurging geopolitical tensions, particularly within the Middle Eastern region. The current conflict in the Red Sea has escalated shipping costs for trade between Asia and Europe, owing to the rerouting of cargoes around Africa. Even though the disruptions currently remain limited, the situation could potentially escalate, warned IMF's spokesperson, Gourinchas.
In what the IMF has termed as the largest global election year in recorded history, there have been increasing demands for augmented state expenditure. The IMF commentary warns that this may defer the fiscal consolidation plans that many governments aim to implement during 2024-25. Although an uptick in public spending might stimulate overall economic activity, Gourinchas warned that it could equally trigger inflation and increase the likelihood of economic disruption in the future.
