In a positive turn of events, the International Monetary Fund (IMF) has recently revised its projections for global economic growth, unveiling an optimistic outlook for 2024. The upgraded forecasts specifically highlight positive trends in the world’s largest economies, the United States and China. This upward shift is attributed to a quicker-than-anticipated easing of inflationary pressures, signaling what the IMF’s chief economist, Pierre-Olivier Gourinchas, describes as a “soft landing” on the economic horizon.
The Global Economic Landscape: A Resilient Display
Despite the challenges faced, the global economy showcases remarkable resilience, with inflation steadily on the decline and growth maintaining its momentum. Gourinchas emphasizes that while the chance of a ‘soft landing’ has increased, the world is still a considerable distance away from a scenario of global recession.
Persistent Risks and Cautionary Notes
However, caution prevails as Gourinchas acknowledges the slow base of expansion and lingering risks. Geopolitical tensions in the Middle East and Red Sea attacks pose potential disruptions to commodity prices and supply chains. Additionally, the IMF economist warns that delays in announced fiscal consolidation, especially in the context of what he terms “the biggest global election year in history,” could introduce both economic activity boosts and inflationary pressures.
Factors Driving Improved Outlook
The IMF attributes the improved economic outlook to a combination of factors. These include robust private and public spending in the face of tight monetary conditions, increased labor force participation, mended supply chains, and more affordable energy and commodity prices.
Projected Global Growth and Trade
The IMF now forecasts a global growth rate of 3.1% in 2024, an increase of two-tenths of a percentage point from its previous October estimate. However, it anticipates stable growth of 3.2% in 2025, still below the historical average for the 2000-2019 period, which stood at 3.8%. Global trade is expected to expand by 3.3% in 2024 and 3.6% in 2025, reflecting a cautious optimism tempered by numerous fresh trade restrictions.
Inflation and Oil Price Projections
In terms of inflation, the IMF maintains its October forecast of 5.8% for 2024 but lowers the 2025 projection to 4.4% from the previous 4.6%. Excluding Argentina, global headline inflation is expected to be lower, according to Gourinchas. Advanced economies aim for an average inflation rate of 2.6%, while emerging markets and developing economies may experience inflation averaging 8.1% in 2024 before easing to 6% in 2025.
The IMF also anticipates a 2.3% drop in average oil prices in 2024, deviating from its initial October prediction of a 0.7% decline. Furthermore, prices are expected to decrease by 4.8% in 2025.
Navigating Challenges for a Soft Landing
Gourinchas acknowledges that maintaining the trajectory towards a ‘soft landing’ won’t be without challenges. Potential commodity price spikes from geopolitical shocks, especially continued attacks in the Red Sea, may prolong tight monetary conditions. Despite closely monitoring developments in the Middle East, Gourinchas suggests that the broader economic impact appears relatively limited at present.
Country-Specific Updates
United States: Fiscal Support and Cautionary Notes
The United States receives one of the most significant upgrades in the IMF’s January update, with GDP now forecasted to expand by 2.1% in 2024, up from the 1.5% projected in October. Gourinchas credits this boost to fiscal support and consumer spending. However, the IMF has cautioned Washington about potential violations of global trade rules resulting from certain subsidies and industrial policies.
Euro Area and Germany: Contrasting Fortunes
Conversely, the euro area faces a downgrade, with an expected growth rate of just 0.9% in 2024 and 1.7% in 2025. Germany, the largest European economy, sees minimal GDP growth of 0.5% in 2024, down from the 0.9% forecast in October.
China: Fiscal Support Spurs Growth
China’s GDP is expected to grow by 4.6% in 2024, a positive revision from October’s forecast. Gourinchas attributes this boost to significant fiscal support and a less-severe-than-expected slowdown in the property sector.
Monetary Policy Predictions
Looking ahead, Gourinchas predicts that the U.S. Federal Reserve, European Central Bank, and Bank of England will gradually lower interest rates in the second half of 2024. However, he emphasizes that this transition is not imminent. The Bank of Japan is expected to maintain low interest rates, but the IMF advises readiness to raise rates in response to potential inflation spikes.
Market Sentiments and Fiscal Considerations
Gourinchas warns that markets might be excessively optimistic about early interest rate cuts by major central banks. A repricing could lead to increased long-term interest rates, triggering rapid fiscal consolidation that may impact growth prospects negatively.
Emerging Markets: Divergent Paths
Emerging market and developing economies are projected to grow by 4.1% in 2024. Notably, emerging and developing Europe receives an upgrade due to stronger-than-expected growth in Russia, fueled by military spending for the war in Ukraine.
Regional Variances: Russia, Argentina, and Latin America
Russia’s GDP is expected to grow by 2.6% in 2024, surpassing previous October estimates. However, questions linger about the extent of Russia’s fiscal stimulus. On the other hand, negative growth in Argentina depresses the forecast for the Latin America and Caribbean region.
Balancing Upside and Downside Risks
Gourinchas concludes that the global economic outlook now reflects more balanced upside and downside risks. The potential for a wider conflict in the Middle East is offset by the prospect that lower fuel prices could expedite the decline in inflation. The IMF sees these risks as broadly balanced, considering that many of the downside risks observed a year ago, especially regarding disinflation, have not materialized.
