The International Monetary Fund expects the world to avoid recession and enter a soft landing in 2024, while inflation rates decline.
The United States, China and large emerging markets are all expected to post higher growth as central banks begin easing high interest rates that have been used to cool economies around the world.
In its new World Economic Outlook report, the IMF forecasts that the global economy will grow by 3.1% this year, the same as in 2023, and by 2025 it will grow more modestly by around 3.2%.
The latest forecast is two-tenths of a percentage point higher than the international body estimated in October, reflecting progress in reining in inflation and raised growth outlooks in China, the United States and large emerging markets. ing.
“Inflation is coming down faster than expected,” Pierre-Olivier Grinchat, the IMF's chief economist, said in an interview.
International Monetary Fund Chief Economist Pierre-Olivier Grinchat, right. (Photo by Jim Watson/AFP via Getty Images) (Jim Watson via Getty Images)
“We're going to see a little bit more growth, a little bit more inflation,” he added. “As a result, we now expect a soft landing to be more likely.”
Still, growth in the coming years is expected to expand at a rate below the historical average of 3.8% from 2000 to 2019. This is due to the lag effect of relatively high interest rates expected to continue even if the central bank begins to ease monetary policy.
Consider the United States. Fed officials expect a median of three rate cuts in 2024. Growth is expected to slow to 2.1% from 3.1% last year, then fall to 1.7% in 2025 due to a lag from the Fed's aggressive interest rates. Hiking campaigns and a cooling job market.
Read more: What the Fed's rate hike pause means for bank accounts, CDs, loans, and credit cards
Federal Reserve Chairman Jerome Powell. (Photo by Win McNamee/Getty Images) (Win McNamee via Getty Images)
Grinchas said productivity may explain part of why inflation has fallen in the U.S. and the economy continues to outperform, with productivity rising from early 2023 levels in recent quarters. He noted that he is recovering.
“We see further growth and a slight cooling of the labor market,” he said. “The results are consistent with increased productivity, but they are not seen in all countries and in all places.”
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Grinchas said that despite strong job creation in Europe, growth was still not very strong, noting that productivity was not included.
Meanwhile, China's economy is estimated to rise 4.6% this year, 0.4% higher than previously expected, due to stronger-than-expected growth last year and increased government spending.
“Risks to global growth are broadly balanced, with deflation and stable growth reducing the likelihood of a hard landing,” the IMF said in a report.
image of inflation
The fact that inflation is falling faster than expected is expected to allow central banks to slowly take their foot off the pedal and start cutting interest rates, easing pressure on a low-growth recession scenario.
The reasons for the decline in inflation are wide-ranging, from falling energy prices and easing supply chain bottlenecks to a cooling labor market, fewer job openings, a slight increase in unemployment, and an increase in the supply of workers due to increased immigration. .
Global headline inflation is expected to fall to 5.8% this year and 4.4% in 2025, in line with previous forecasts, from an estimated 6.8% last year.
The question for central bankers is when to start cutting interest rates. Grinchat warned that if the central bank cuts rates too soon, there is a risk that the progress made so far by injecting additional stimulus into the economy will depress inflation.
But Grinchas said the IMF believes the Fed is in a position to cut rates in the second half of this year as inflation falls further. He said he believed the central bank's forecast for three rate cuts was about right.
There are several risks clouding the outlook for inflation and growth. For one, continued attacks in the Red Sea could cause commodity prices to soar, disrupt supply transport, lead to higher inflation, and cause central banks to keep interest rates high for an extended period of time.
The other is that problems in China's real estate sector could worsen, reducing China's growth and, by extension, global growth.
On the fiscal front, a disruptive shift toward tax increases and spending cuts could also cause growth disappointment.
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