The International Monetary Fund has revised its outlook for the world economy upwards this year, forecasting resilient growth led by the United States and a slower pace of inflation.
In its latest outlook, the 190-country lending agency said Tuesday it expects the global economy to grow 3.1% this year, unchanged from 2023 but better than the 2.9% forecast for 2024 in the its previous estimate in October.
Globally, the IMF believes inflation will fall from 6.8% in 2023 to 5.8% in 2024 and 4.4% in 2025. In more advanced economies, the agency expects inflation to fall this year at 2.6% and next year at the 2% level. the Federal Reserve and some other central banks have set as a target.
The combination of steady growth and falling inflation has raised hopes for a so-called soft landing for the global economy – a slowdown sufficient to contain inflation without causing a recession.
“We are now on the final descent to a soft landing,” Pierre-Olivier Gourinchas, the IMF’s chief economist, told reporters ahead of the report’s release.
The forecast for overall global growth this year and next (3.2%) is in line with the 3.8% average from 2000 to 2019. This is partly because the Fed and other central banks have aggressively raised interest rates to combat high inflation, and the resulting higher borrowing costs slowed spending and investment.
Gourinchas said he expected “relatively limited” economic damage from attacks by Yemen-based Houthi rebels on ships in the Red Sea. The attacks forced container ships carrying goods between Asia and Europe to avoid the Suez Canal and instead take the longer route around the tip of Africa, thereby delaying and disrupting shipments and raising freight rates . But Gourinchas said that for now the Red Sea disruptions do not appear to be “a major source of reigniting supply-side inflation,” which has resulted from much more severe shipping backlogs in 2021 and 2022.
For the United States, the world’s largest economy, the International Monetary Fund has sharply raised its growth forecast this year to 2.1% from the 1.5% forecast three months ago. The U.S. economy grew 2.5% in 2023 after an unexpected burst of year-end growth fueled by consumers’ willingness to spend despite higher borrowing costs.
The outlook for the crisis in the Chinese economy has also been improved by the IMF. It now expects the world’s second-largest economy to grow 4.6% this year, up from the 4.2% forecast in October, but down from 5.2% growth in 2023. Government spending helped offset the damage from the collapse of China’s real estate market. .
“There has been a lot of resilience in many, many parts of the world,” Gourinchas said, singling out Brazil, India, Southeast Asia and Russia, which has remained surprisingly robust in the face of Western sanctions imposed after the invasion of Ukraine .
But the IMF has lowered the outlook for some countries. Europe, for example, continues to struggle with disheartened consumers and the lingering effects of the energy price shock caused by Russia’s invasion of Ukraine. The IMF expects the 20 countries that share the euro to collectively grow a meager 0.9% this year. That would be 0.5% growth in 2023, but lower than the IMF’s October forecast of 1.2% growth for the eurozone this year.
The IMF also slightly lowered its outlook for the Japanese economy to 0.9%, down from 1.9% growth in 2023.
The improving inflation outlook is the result of higher interest rates, the end of the supply chain backlogs of the last two years, more workers entering the job market and lower energy prices after the surge caused by the war in Ukraine. The IMF expects oil prices, which fell 16% in 2023, to fall a further 2.3% this year and 4.8% in 2025.
The world economy is still exposed to risks. The first is that financial markets have become too confident that the Fed will reverse course and start cutting rates as early as its March meeting. Gourinchas said he doesn’t expect the rate cut to begin until the second half of 2024. Disappointed investors could send stock prices lower if they don’t see lower rates as soon as they hope.
Another is that geopolitical tensions, especially between the United States and China, could disrupt global trade. Gourinchas suggested that some of President Joe Biden’s economic policies, including those that benefit American makers of computer chips and green technology, could violate World Trade Organization rules.
The IMF expects world trade to grow just 3.3% this year and 3.6% in 2025, below the historical average of 4.9%.