IMF predicts modest global economic growth, cautions on slowing disinflation

The International Monetary Fund (IMF) on Tuesday said the global economy is set for modest growth over the next two years amid cooling activity in the U.S., a bottoming-out in Europe and stronger consumption and exports for China, but risks to the path abound.

 

In an update to its World Economic Outlook, the IMF warned that momentum in the fight against inflation is slowing, which could further delay an easing of interest rates and keep up strong dollar pressure on developing economies.

Overall, the IMF said it still expects the world economy to grow a lackluster 3.2% this year, unchanged from its previous forecast in April and down a tick from 3.3% growth in 2023. From 2000 through 2019, before the pandemic upended economic activity, global growth had averaged 3.8% a year.

The organization raised its 2025 forecast by 0.1 percentage point to 3.3%.

The IMF, a 190-nation lending organization, works to promote economic growth and financial stability and reduce global poverty. In a blog post that accompanied the latest update to its World Economic Outlook, the IMF’s chief economist, Pierre-Olivier Gourinchas, wrote that China and India would account for nearly half of global growth this year.

“Growth in major advanced economies is becoming more aligned as output gaps are closing,” Gourinchas said, adding that the U.S. was showing increasing signs of cooling, while Europe was poised to pick up.

China risks

Partly because of a surge in Chinese exports at the start of 2024, the IMF upgraded its growth forecast for China this year to 5% from the 4.6% it had projected in April, though down from 5.2% in 2023. It also boosted its 2025 China growth forecast to 4.5% from 4.1% in April.

The IMF forecast came a day after Beijing reported that the Chinese economy, the world’s second-largest after the United States, had grown at a slower-than-expected 4.7% annual rate from April through June amid weak consumer spending and a protracted property downturn, down from 5.3% in the first three months of the year.

Gourinchas told Reuters in an interview that the new data poses a downside risk to the IMF forecast, as it signals weakness in consumer confidence and continuing problems in the property sector. To boost domestic consumption, China needs to fully resolve its property crisis, as real estate is the main asset for most Chinese households.

“When you’re looking at China, the weaker the domestic demand, the more growth is going to rely potentially on the external sector,” he said, inviting more trade tensions.

China’s economy, which once regularly grew at a double-digit annual pace, is facing significant challenges, notably the collapse of its housing market and an aging population that is leaving the country with labor shortages. By 2029, Gourinchas wrote, China’s growth will slow to 3.3%.

India’s economy is now forecast to expand 7%, up from the 6.8% the IMF had projected in April, in part because of stronger consumer spending in rural areas.

The IMF said that the “shoots of recovery materialized in Europe,” which had been battered by high energy prices and other economic damage from Russia’s 2022 invasion of Ukraine.

Citing a rise in Europe’s services businesses, IMF raised its 2024 growth forecast for the 20 countries that share the euro currency by a tenth of a percentage point from its April forecast, to 0.9%, leaving the bloc’s 2025 forecast unchanged at 1.5%.

In 2023, the eurozone grew 0.5%.

The bloc has “bottomed out” and saw stronger first-half services growth, while rising real wages will help power consumption next year and easing monetary policy will aid investment, the IMF said.

But a weak first quarter in the United States led the IMF to downgrade its forecast for U.S. growth this year to 2.6% from the 2.7% it had predicted in April.

Likewise, the IMF lowered its outlook for 2024 growth in Japan to 0.7% from the 0.9% it had envisioned in April and from 1.9% in 2023. Japan’s first-quarter growth was disrupted by the shutdown of a major automobile plant, the IMF said.

Inflation risks remain

After surging to 8.7% in 2022 as the global economy rapidly recovered from the pandemic recession, worldwide inflation is expected to continue easing – from 6.7% in 2023 to 5.9% this year and 4.4% in 2025.

But progress is slowing, the IMF said, because services inflation has proved persistently difficult to tame. The fund warned that some central banks may keep interest rates higher for longer than anticipated until they’re convinced that inflation is firmly under control. Higher-than-expected borrowing costs could weaken global growth as a result.

“The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal and financial risks,” the IMF said in the report.

“The good news is that as headline shocks receded, inflation came down without a recession,’’ Gourinchas wrote. The bad news, he said, is that it still isn’t back to pre-pandemic levels.

Gourinchas said that despite a fall in U.S. consumer prices last month, the Federal Reserve (Fed) can afford to wait a bit longer to begin cutting rates to avoid any inflationary surprises.

The IMF also warned of potential swings in economic policy as a result of many elections this year that could have negative spillovers to the rest of the world.

“These potential shifts entail fiscal profligacy risks that will worsen debt dynamics, adversely affecting long-term yields and ratcheting up protectionism,” the fund said.

The fund did not name U.S. Republican Party candidate Donald Trump, who has proposed to impose a 10% tariff on all U.S. imports, nor Democratic President Joe Biden, who has sharply hiked tariffs on Chinese electric vehicles, batteries, solar panels and semiconductors.

But it said that higher tariffs and scaling up of domestic industrial policy could create “damaging cross-border spillovers, as well as trigger retaliation, resulting in a costly race to the bottom.”

Instead, the IMF recommended that policymakers persevere with restoring price stability – easing monetary policy only gradually – replenish fiscal buffers drained during the pandemic and pursue policies that promote trade and increase productivity.

 

 

 

 

 

 

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