IMF says global ‘soft landing’ in sight, raises 2024 economic growth outlook

The International Monetary Fund on Tuesday edged its forecast for global economic growth higher, upgrading the outlook for both the United States and China – the world’s two largest economies – and citing faster-than-expected easing of inflation.

The IMF’s chief economist, Pierre-Olivier Gourinchas, said the global lender’s updated World Economic Outlook showed that a “soft landing” was in sight, but overall growth and global trade still remained lower than the historical average.

“We find that the global economy continues to display remarkable resilience and we are now in the final descent toward a ‘soft landing’ with inflation declining steadily and growth holding up,” Gourinchas said. “But the base of expansion remains on the slower side and there might be turbulence ahead.”

The IMF said the improved outlook was supported by stronger private and public spending despite tight monetary conditions, as well as increased labor force participation, mended supply chains and cheaper energy and commodity prices.

The IMF forecast global growth of 3.1 per cent in 2024, up two-tenths of a percentage point from its October forecast, and said it expected unchanged growth of 3.2 per cent in 2025. The historical average for the 2000-2019 period was 3.8 per cent.

It forecast global trade growth of 3.3 per cent in 2024 and 3.6 per cent in 2025, well below the historical average of 4.9 per cent, with gains weighed down by some 3,000 trade restrictions that were imposed in 2023.

The IMF stuck with its October forecast for headline inflation of 5.8 per cent for 2024, but lowered the 2025 forecast to 4.4 per cent from 4.6 per cent in October. Excluding Argentina, which has seen inflation spike, global headline inflation would be lower, Gourinchas said.

Advanced economies should see average inflation of 2.6 per cent, down four-tenths of a percentage point from the October forecast, with inflation set to reach central bank targets of 2 per cent in 2025. By contrast, inflation would average 8.1 per cent in emerging market and developing economies in 2024, before easing to 6 per cent in 2025.

The IMF said average oil prices would drop 2.3 per cent in 2024, versus the 0.7 per cent decline it had predicted in October, and said prices were expected to drop 4.8 per cent in 2025.

 

RED SEA ATTACKS

The IMF said new commodity price spikes from geopolitical shocks, including continued attacks on shipping in the Red Sea, could prolong tight monetary conditions. Gourinchas told reporters the IMF was watching developments in the Middle East closely, but the broader economic impact remained “relatively limited.”

“It doesn’t seem to represent, as of now, a major source of potentially reigniting supply-side inflation,” he said.

The United States got one of the biggest upgrades in the January update of the IMF outlook, with its GDP now forecast to expand by 2.1 per cent in 2024 versus the 1.5 per cent forecast in October. Growth was expected to ease to 1.7 per cent in 2025.

Gourinchas credited fiscal support and strong consumer spending for the upgrade, but said the IMF had told Washington it had concerns that some of its subsidies from domestic producers and other industrial policies could violate global trade rules.

The euro area got a downgrade, and was now expected to grow just 0.9 per cent in 2024 and 1.7 per cent in 2025, with the biggest European economy – Germany – expected to see minimal GDP growth of 0.5 per cent in 2024 instead of the 0.9 per cent forecast in October.

China’s GDP was expected to grow by 4.6 per cent in 2024, an upward revision of four-tenths of a percentage point from October, and 4.1 per cent in 2025. Gourinchas said the boost reflected significant fiscal support from the authorities, and a less-severe-than-expected slowdown stemming from the property sector.

He said the US Federal Reserve, European Central Bank and Bank of England were expected to keep interest rates steady at current levels until the second half of 2024, with a gradual decline expected thereafter.

The Bank of Japan was expected to maintain low interest rates, and that was “appropriate,” but the IMF had told it to be ready to raise rates if inflation spiked, he said.

Gourinchas added that markets had been “excessively optimistic” on the prospects for early interest rate cuts by major central banks, and a repricing could increase long-term interest rates and trigger more rapid fiscal consolidation that would weigh on growth prospects.

Growth in emerging market and developing economies overall was expected to come in at 4.1 per cent in 2024, with emerging and developing Europe getting an upgrade due to stronger than expected growth in Russia on the back of high military spending related to the ongoing war in Ukraine.

Russia’s GDP was expected to grow 2.6 per cent in 2024, 1.5 percentage points more than expected in October, with growth seen easing to 1.1 per cent in 2025. The IMF said there could be further revisions since the numbers were preliminary and there were questions about the extent of Russia’s fiscal stimulus.

Negative growth in Argentina dragged the forecast for the Latin America and Caribbean region lower, with growth likely to decline to 1.9 per cent in 2024, four-tenths of a percentage point lower than in October. Growth should edge higher to 2.5 per cent in 2025, the IMF said.

Gourinchas said the global outlook reflected more balanced upside and downside risks, with the risk of a wider conflict in the Middle East offset by the prospect that lower fuel prices could help inflation fall faster than expected.

“We see them as broadly balanced at this point,” he said, noting that a lot of the downside risks – especially with respect to disinflation – seen a year ago had not materialized.