The International Monetary Fund (IMF) has recently revised its outlook for the global economy, forecasting resilient growth led by the United States and a gradual decline in inflation. According to the IMF's latest report, released on Tuesday, the global economy is expected to grow by 3.1% this year, the same rate as in 2023, but better than the previous estimate of 2.9% for 2024.
Inflation, a key concern for many economies, is anticipated to ease from 6.8% in 2023 to 5.8% in 2024 and 4.4% in 2025 worldwide. Advanced economies are predicted to experience a drop in inflation to 2.6% this year, followed by a decline to 2% next year, in line with the targets set by the Federal Reserve and other central banks.
The combination of steady growth and diminishing inflation has raised hopes for a 'soft landing' of the global economy, meaning a slowdown that can contain inflation without triggering a recession. Pierre-Olivier Gourinchas, the IMF's chief economist, expressed optimism, stating, 'We are now in the final descent toward a soft landing.'
While the projected overall global growth rate of 3.2% for this year and next falls short of the 3.8% average recorded between 2000 and 2019, it can be attributed to aggressive interest rate hikes by central banks aimed at combatting high inflation. These measures have led to higher borrowing costs, impacting spending and investment.
Addressing concerns about recent disruptions in the Red Sea caused by attacks from Yemen-based Houthi rebels, Gourinchas downplayed the potential economic damage. He stated that the disruptions are unlikely to be a significant source of reigniting supply-side inflation, assuaging fears that arose from severe shipping backlogs in 2021 and 2022.
The IMF significantly revised its growth estimate for the United States, predicting a rise to 2.1% this year compared to the previous 1.5% projection made three months ago. This positive outlook reflects the unexpected year-end growth in 2023 driven by consumer spending despite higher borrowing costs.
The IMF also upgraded its forecast for the Chinese economy, expecting it to grow by 4.6% this year, up from the previous estimate of 4.2% in October. However, this is lower than the 5.2% growth recorded in 2023. The Chinese government's spending initiatives have mitigated the impact of the housing market collapse.
Gourinchas highlighted the resilience of several regions around the world, including Brazil, India, Southeast Asia, and surprisingly, Russia, which has remained sturdy despite Western sanctions imposed after its invasion of Ukraine.
Nevertheless, the outlook for certain areas has been downgraded. Europe continues to struggle with dispirited consumers and the lingering effects of the energy price shock caused by the Russian invasion of Ukraine. The IMF anticipates meager growth of 0.9% for the eurozone countries collectively this year, an improvement from 0.5% in 2023 but lower than the October forecast of 1.2% growth.
Japan's economic outlook has also been revised downward, with a growth rate of 0.9% for this year, reflecting a drop from the 1.9% growth recorded in 2023.
The improved inflation outlook can be attributed to higher interest rates, the resolution of supply chain backlogs, increased labor force participation, and lower energy prices following the spike caused by the conflict in Ukraine. The IMF expects oil prices, which fell by 16% in 2023, to decrease by a further 2.3% this year and 4.8% in 2025.
Despite the positive trajectory, the global economy still faces risks. One such risk is overconfidence in financial markets, where investors anticipate rate cuts from the Federal Reserve as early as March. Gourinchas, however, believes that rate cuts will not occur until the second half of 2024, potentially leading to disappointed investors and a decrease in stock prices.
Geopolitical tensions, particularly between the United States and China, also pose a threat to world trade. Gourinchas raised concerns that some of President Joe Biden's economic policies, designed to benefit American producers of computer chips and green technology, might violate World Trade Organization rules.
The IMF projects that world trade will grow by a modest 3.3% this year and 3.6% in 2025, below the historical average of 4.9%. While the outlook for the global economy appears positive, vigilance and careful monitoring of potential risks should remain priorities for policymakers and market participants alike.
