IMF Says Global Economy Resilient Despite Gloomy Predictions
Global economic growth is expected to hold steady at 3.2%, according to the IMF’s April 2024 World Economic Outlook projections. The IMF projects median headline inflation to decline from 2.8% at the end of 2024 to 2.4% at the end of 2025. Nonetheless, policymakers should “prioritize steps toward greater economic resilience such as strengthening government finances and revitalizing economic growth prospects.”
The IMF projects less “economic scarring” from the COVID-19 crises, noting that the U.S. economy has passed its pre-pandemic trend. Low-income developing countries, however, are still struggling to recover from the pandemic and from cost-of-living crises. The IMF also reporting reduced energy price shocks and increased labor supply “supported by strong immigration in many advanced economies.” Monetary policy has also helped inflation expectations.
Inflation Risks
The risks of inflation remain and reducing inflation should remain the priority. The IMF noted that a decline in energy prices has reduced inflation, but the increase in oil prices due partly to geopolitical tensions and services inflation “remains stubbornly high.” Further trade restrictions on Chinese exports could also push up goods inflation.
Widening Economic Divergence
There is also a divergence across countries.
U.S. economy: The IMF noted that the U.S. economy has had robust productivity and employment growth, but also “strong demand in an economy that remains overheated” and requires “cautious and gradual” easing by the Federal Reserve. “The fiscal stance, out of line with long-term fiscal sustainability, is of particular concern. It raises short-term risks to the disinflation process, as well as longer-term fiscal and financial stability risks for the global economy. Something will have to give.”
Euro area: The IMF projected growth in the euro area to rebound but from very low levels. Continued high wage growth and persistent services inflation could delay the return of inflation to target. The IMF noted that there is “little evidence of overheating, and the European Central Bank will need to carefully calibrate the pivot toward monetary easing to avoid an inflation undershoot.” Strong labor markets could prove “illusory if European firms have been hoarding labor in anticipation of a pickup in activity that does not materialize.”
China: China’s economy is suffering from the downturn in its property sector. The IMF projects that domestic demand “will remain lackluster unless strong measures address the root cause.” This reduced demand could increase external surpluses and could “further exacerbate trade tensions in an already fraught geopolitical environment.”
Policy Priorities
The IMF outlined policy priorities to “preserve or even enhance the resilience of the global economy.”
Rebuild fiscal buffers: Real interest rates remain high and “sovereign debt dynamics have become less favorable.” The IMF called for fiscal consolidations to help “lower funding costs, improve fiscal headroom and financial stability.” The IMF noted that the number of elections in 2024 could derail any fiscal plans.
Reverse the decline in medium term growth prospects: The decline in medium term growth comes from increased misallocation of capital and labor and rising “geoeconomic fragmentation and the surge in trade restrictive and industrial policy measures.” The IMF recommends that low-income countries pursue structural reforms to promote domestic and foreign direct investment, “strengthen domestic resource mobilization,” and “improve the human capital of their large young populations.” For trade restrictions, the IMF noted that the “broader damage is to global cooperation. It is still time to reverse course.”
Preserve monetary, fiscal and financial policy frameworks: The IMF noted that “a great achievement of the past few years has been the strengthening of monetary, fiscal and financial policy frameworks especially for emerging market economies.” It noted the necessity of preserving these improvements, including “protecting the hard-won independence of central banks.”
Invest in carbon reduction: The IMF stated that emerging market and developing economies “must massively increase their green investment growth and reduce their fossil fuel investment.” This investment will require technology transfer from advanced economies and China and “substantial private and public financing.”