IMF Encouraged by Increasing Prospects of a Smooth Global Economic Descent

The International Monetary Fund (IMF) has expressed cautious optimism that central banks will successfully combat inflation without pushing the global economy into a recession. However, the organization has emphasized the persistent weakness and irregularity in global economic growth.

The IMF maintains its earlier projection of a 3% expansion of the world economy for this year, aligning with its July forecast. This forecast remains steady due to stronger-than-expected growth in the United States, even though predictions for China and Europe have been downgraded slightly, with a 0.1 percentage point reduction to 2.9% growth in 2024.

Reaffirming its stance from July, the IMF acknowledges the resilience of the global economy in the face of the pandemic and the Ukraine conflict. However, it continues to warn of downside risks, emphasizing that economic activity has slowed but not come to a standstill. In the words of IMF Chief Economist Pierre-Olivier Gourinchas, “The global economy is limping along.”

The IMF’s outlook now leans more towards a “soft landing” scenario, particularly in the United States. Gourinchas acknowledges that growth remains sluggish and uneven, particularly in Europe and China, compared to previous forecasts.

The Eurozone, consisting of 20 countries, is now expected to collectively grow by 0.7% this year and 1.2% next year, reflecting a 0.2 and 0.3 percentage point downgrade, respectively, from July. China’s growth expectations have been revised to 5% for this year and 4.2% in 2024, down from 5.2% and 4.5%.

In contrast, the United States is expected to experience stronger growth than previously anticipated, with the IMF revising its forecasts to 2.1% in 2023 and 1.5% in 2024, representing improvements of 0.3 and 0.5 percentage points, respectively. The IMF lauds the United States for having the strongest recovery among major economies.

Regarding inflation, the IMF anticipates a continued decrease, which supports the notion of a “soft landing” in major economies. However, it does not foresee a return to central banks’ targeted inflation levels until 2025 in most cases. The IMF has adjusted its global inflation forecasts to 6.9% for this year and 5.8% for next year, marking increases of 0.1 and 0.6 percentage points, respectively.

The IMF has identified commodity prices as a significant risk to the inflation outlook, particularly in the face of climate and geopolitical shocks. High oil and natural gas prices, which led to soaring energy costs, contributed to inflation reaching multi-decade highs in 2022. The recent spike in oil prices due to concerns about the Israel-Hamas conflict could exacerbate inflationary pressures.

Bond investors are on edge, anticipating that major central banks will maintain higher interest rates for an extended period to combat inflation. The IMF also underscores the concern that high inflation could become a self-fulfilling prophecy. If households and businesses expect prices to continue rising, this anticipation could lead to higher prices for goods and services, or demands for increased wages.

The IMF emphasizes that the “expectations channel” is critical in determining whether central banks can achieve the elusive “soft landing” of reducing inflation to target levels without triggering a recession.

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