IMF says moderating inflation, steady growth open path to soft landing, but warns of risks

The International Monetary Fund (IMF) has upgraded the global growth outlook for 2024 on the back of greater-than-expected resilience in the United States and several large emerging markets and developing economies, as well as fiscal support in China.

In its latest World Economic Outlook (WEO) update for January, the IMF said that global growth, which was at 3.1 percent in 2023, is projected to remain at 3.1 percent in 2024 before rising modestly to 3.2 percent in 2025. Compared with that in the October 2023 WEO, the forecast for 2024 is about 0.2 percentage points higher, reflecting upgrades for China, the United States, and large emerging markets and developing economies.

However, the IMF said, that this projection for global growth in 2024 and 2025 is below the historical (2000–19) annual average of 3.8 percent, reflecting restrictive monetary policies and withdrawal of fiscal support, as well as low underlying productivity growth.

Advanced economies are expected to see growth decline slightly in 2024 before rising in 2025, with a recovery in the euro area from low growth in 2023 and a moderation of growth in the United States. Emerging Markets and developing economies are expected to experience stable growth through 2024 and 2025, with regional differences, the report added.

"The clouds are beginning to part. The global economy begins the final descent toward a soft landing, with inflation declining steadily and growth holding up. But the pace of expansion remains slow, and turbulence may lie ahead," IMF's Chief Economic Pierre-Olivier Gourinchas said in a blog.

"Important divergences remain. We expect slower growth in the United States, where tight monetary policy is still working through the economy, and in China, where weaker consumption and investment continue to weigh on activity. In the euro area, meanwhile, activity is expected to rebound slightly after a challenging 2023, when high energy prices and tight monetary policy restricted demand. Many other economies continue to show great resilience, with growth accelerating in Brazil, India, and Southeast Asia’s major economies," Gourinchas said.

For advanced economies, growth is projected to decline slightly from 1.6% in 2023 to 1.5% in 2024 before rising to 1.8% in 2025. An upward revision of 0.1 percentage point for 2024 reflects stronger-than-expected US growth, partly offset by weaker-than-expected growth in the euro area, IMF said. In emerging markets and developing economies, growth is expected to remain at 4.1% in 2024 and to rise to 4.2% in 2025. An upward revision of 0.1 percentage point for 2024 since October 2023 reflects upgrades for several regions, the report added.

The IMF has also upgraded India’s growth outlook on the back of better-than-expected resilience in its domestic demand. IMF now expects India’s GDP to grow by 6.7% in FY24, 40 basis points higher than its previous forecast of 6.3% given in the October 2023 update of its report. One basis point is one-hundredth of a percent. For FY25 and FY26, India’s GDP growth is seen steady at 6.5%, a 20 basis point upgrade from its October 2023 forecast, the IMF said in its report released on Tuesday.

World trade growth is projected at 3.3% in 2024 and 3.6% in 2025, below its historical average growth rate of 4.9%, the IMF said in its report. "Rising trade distortions and geoeconomic fragmentation are expected to continue to weigh on the level of global trade," IMF said.

Countries imposed about 3,200 new restrictions on trade in 2022 and about 3,000 in 2023, up from about 1,100 in 2019, according to Global Trade Alert data. These forecasts are based on assumptions that fuel and nonfuel commodity prices will decline in 2024 and 2025 and that interest rates will decline in major economies.

Global headline inflation is expected to fall from an estimated 6.8 percent in 2023 (annual average) to 5.8 percent in 2024 and 4.4 percent in 2025, the report said.  The global forecast is unrevised for 2024 compared with October 2023 projections and revised down by 0.2 percentage points for 2025.

"Advanced economies are expected to see faster disinflation, with inflation falling by 2.0 percentage points in 2024 to 2.6 percent, than are emerging market and developing economies, where inflation is projected to decline by just 0.3 percentage point to 8.1 percent,” it said. The Fund said that overall, about 80 percent of the world’s economies are expected to see lower annual average headline and core inflation in 2024.

The IMF warned that there were several risks to its macroeconomic projections.

On the upside, "Disinflation could happen faster than anticipated, especially if labour market tightness eases further and short-term inflation expectations continue to decline, allowing central banks to ease sooner. Fiscal consolidation measures that governments have announced for 2024-25 may be delayed as many countries face rising calls for increased public spending in what is the biggest global election year in history.

This could boost economic activity, but also spur inflation and increase the prospect of disruption later. Looking further ahead, rapid improvement in Artificial Intelligence could boost investment and spur rapid productivity growth, albeit one with significant challenges for workers," Pierre-Olivier Gourinchas highlighted. On the downside, any new commodity and supply disruptions, and more persistent core inflation, were highlighted as risks.

"With inflation drivers and dynamics differing across economies, policy needs for ensuring price stability are increasingly differentiated. At the same time, in many cases, amid rising debt and limited budgetary room to maneuver, and with inflation declining and economies better able to absorb effects of fiscal tightening, a renewed focus on fiscal consolidation is needed," the report said.

Intensifying supply-enhancing reforms would facilitate both inflation and debt reduction and enable a durable rise in living standards, IMF said.