In a recent update on the World Economic Outlook, the IMF has opined that the risks to global growth are broadly balanced and there seems to be a possibility of soft landing. According to the IMF, the global growth rate is estimated to be around 3.1 percent for the year 2024 and 3.2 percent in the succeeding year 2025. Thus the 2024 forecast has been revised to be higher by 0.2 percentage point compared to the October 2023 World Economic Outlook (WEO). The major reasons are the improved resilience in the United States and several large emerging market and developing economies, and better fiscal support observed in China.
But at the same time the estimated growth rate for the year 2024-25 is projected to be still lower than the historical (2000–19) average of 3.8 percent because IMF expects that :
- the central bank policy rates may continue to be at elevated levels in view of high levels of inflation
- the withdrawal of fiscal support may also continue amid high debt weighing on economic activity, and
- productivity growth may remain subdued.
However, inflation is falling faster than expected in most regions largely due to the combined effect of the resolution of many supply-side issues and restrictive monetary policy in many economies of the world. The IMF expects that Global headline inflation may fall to 5.8 percent in 2024 and to 4.4 percent in 2025. With the inflation melting down and the growth being steady, the likelihood of a hard landing has receded, and risks to global growth are broadly balanced.
IMF therefore suggests that the economies continue to build stronger structural reform momentum to give boost to productivity as inflation risks may continue to be there for quite sometime more, in sight of geopolitical shocks and other sorts of supply disruptions in certain countries. If inflation risks persist it may cause tight monetary conditions to continue. Besides, deepening property sector woes in China and a possibility of tax hikes and spending cuts in certain other economies may also aggravate supply disruptions.
Controlling inflation is the key
IMF suggests that the policymakers must manage near-term challenge by calibrating monetary policy in response to underlying inflation dynamics i.e., for instance where wage and price pressures are clearly showing signs of dissent, monetary policy may be softened complimented by fiscal consolidation in order to absorb future shocks and raise revenue for new spending priorities, and curb the rising incidence of public debt. The focus should be on the achieving higher income levels. Since in a globalized world, most countries’ economic interests are intricately interwoven, there is need for more efficient multilateral coordination in the field of debt resolution, increasing investments, and mitigating the effects of climate change.
Forces shaping Future outlook
A very interesting observation has been made by the IMF regarding the global economy which surprisingly remained resilient despite the COVID-19 pandemic, Russia’s invasion of Ukraine, and the cost-of-living crisis. It needs to be pondered that if the actual results appears to be surprisingly different than what is projected by the IMF, clearly there are forces acting beyond what it based its forecast on. Those additional or extraneous factors need to be identified and duly mapped by it.
For instance, IMF observes that Inflation is falling faster than expected from its 2022 peak, with a smaller-than-expected toll on employment and activity on account of favorable supply-side developments and tightening by central banks. But at the same time observes that high interest rates regimes to fight inflation and withdrawal of fiscal support may affect growth in 2024.
According to the IMF, the following factors are going to shape the outlook of the global economy:
- The degree of resilience shown by the major economies of the world geared by increase in government and consumer spending
- Easing of labor markets and improvement in labor participation
- Resolution of supply chain issues
- Reduction in headline inflation (0,03 percent) at global level which was lower than even what IMF had forecast in the month of October, 2023.