An improved outlook from the International Monetary Fund signals a path to a soft landing thanks to the influential U.S. and other large economies.
The International Monetary Fund is joining the soft landing crowd, pointing in part to “greater-than-expected resilience” in the U.S. economy and fiscal support for China in raising its estimate of global growth going forward.
The global economic and development agency now predicts growth to hit 3.1% this year – an increase from 2.9% from its last projection in October – and 3.2% in 2025.
The forecast for the two-year period is still below the historical average for 2000 to 2019 but does acknowledge that inflation is falling faster than expected in most countries as central banks dial back on restrictive interest rate policies designed to reduce the higher prices that occurred during the COVID-19 pandemic.
Global inflation is expected to fall to 5.8% in 2024 and to 4.4% in 2025.
“The clouds are beginning to part,” Pierre-Olivier Gourinchas, economic counselor and director of research at the IMF, wrote Tuesday on his blog. “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.”
The improved outlook comes as economists in the U.S., including those at the Federal Reserve, are largely dismissive of the idea a recession is likely in 2024. The Fed is meeting this week to consider interest rate policy, with observers overwhelmingly expecting it to hold rates unchanged. Interest rate cuts are anticipated later this year.
That is not to say the global economy is without challenges. Principal among them are geopolitical risks from the ongoing wars in Ukraine and the Middle East that could affect supply chains and energy resources.
Recent attacks by Iranian-backed Houthi militants on ships in the Red Sea are also a particular concern.
“The conflict poses a risk to global trade as the Suez Canal is a vital artery of global trade flows with around 15% of global trade and 25%-30% of global container shipments transiting through this waterway. It also raises concerns about a revival of global inflation pressures as importers face surging shipping costs,” said Lydia Boussour, senior economist at EY-Parthenon.
“For now, we don’t expect the situation in the Red Sea to substantially alter the outlook for global inflation and global monetary policy this year,” she added. “However, a prolonged conflict with shipping costs staying as high through 2024 could add up to 0.7 percentage points to global inflation this year.”
While the IMF projects overall global growth to hit 3.1% and 3.2% in 2024 and 2025, respectively, the organization also sees significant variances among countries. The U.S., with the world’s largest economy, should see 2.1% and 1.7% growth – down from an estimated 2.5% in 2023 but reflecting an upward revision of more than half a percentage point for 2024.
India, meanwhile, is projected to have growth of 6.5% in both 2024 and 2025, and China will grow by 4.6% and 4.1%. China’s rates also represent a decline from 2023 but an upward revision for 2024.
The European region is projected to grow by 0.9% and 1.7%, according to the IMF, while Russia will only see 1.1% growth in 2025. The Middle East and Central Asia can expect growth of 2.9% and 4.2%, with Saudi Arabia seeing 2.7% and 5.5% increases in its economy over the next two years.
The upward revisions to overall growth linked to developments in the U.S. and China underscore both the size of their economies and their influence. In the 2023 Best Countries analysis from U.S. News, survey respondents from around the world placed China at No. 1 and the U.S. at No. 2 for economic influence out of 87 countries.
At the same time, Gourinchas in his blog wrote that tight monetary policy was still expected to affect growth in the U.S., while “weaker consumption and investment continue to weigh on activity” in China.
“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,” Gourinchas wrote. “Many other economies continue to show great resilience, with growth accelerating in Brazil, India, and Southeast Asia’s major economies.”
Eric LeCompte, executive director of the religious development organization Jubilee USA Network, also noted that many countries still face the twin concerns of dealing with the aftermath of the pandemic and crushing debt burdens.
“Most countries are facing economic challenges while their debt payments are too high,” he said “When countries need resources and interest rates on loans are high, we have a recipe for more crises.”
LeCompte also stated that developing countries spend 13% of their budgets repaying debt, more than double the figure 15 years ago.
“While developing countries are still dealing with challenges from the pandemic, slow growth and high debts are bad news,” LeCompte added. “Developing countries need debt relief and more resources to confront continuing economic shocks.”