- 2024-07-13
- News
IMF: Global Anti-Inflation Victory, But Growing Economic Downturn Risks
The global economy has entered a world dominated by supply disruptions, which are caused by climate change, health events, and geopolitical tensions. Inflation rates have returned to the central bank's target area, paving the way for a triple policy shift.
On October 22, local time in the United States, the International Monetary Fund (IMF) released the latest World Economic Outlook report. The report stated that during the deflation process, the global economy has maintained an unusually strong resilience, and the global economic growth rate is expected to be 3.2% in 2024 and 2025. Compared with the forecast released in July, the global economic growth expectation for 2024 remains unchanged, while the forecast for 2025 has been lowered by 0.1%.
In terms of emerging markets, Asian emerging economies have shown strong growth momentum, especially led by countries such as China and India, where demand in the fields of artificial intelligence and electronic products has risen sharply. However, the growth prospects in the Middle East, Central Asia, and sub-Saharan Africa have been overshadowed by multiple factors such as commodity supply chain disruptions, conflicts, and extreme weather. If countries turn to implement undesirable trade and industrial policies, output may be significantly lower than the baseline forecast. Monetary policy may remain overly tight for too long, and the global financial environment may suddenly tighten.
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The IMF expects that in the next five years, the global economic growth rate will remain around 3.1%, which is not significantly better than before the pandemic. Slow productivity growth and population aging and other structural issues continue to suppress the growth potential of the global economy.
The global economy has experienced a surge and subsequent decline in inflation, reflecting a unique combination of shocks: widespread supply disruptions after the pandemic, strong demand pressure, and the subsequent surge in commodity prices due to the Russia-Ukraine situation. The report states that the global inflation situation has improved, with the global average inflation rate expected to be 5.8% in 2024 and 4.3% in 2025. Although inflation data is improving, downside risks are still increasing. Regional conflicts, especially the escalation of tensions in the Middle East, may pose a serious risk to the commodity market.
Specifically, the economic growth forecast for developed economies in 2024 is 1.8%, an increase of 0.1 percentage points from the forecast in July. Among them, the U.S. economic growth rate is expected to be 2.8% in 2024, an increase of 0.2% from July; the growth rate of European developed economies is expected to be 0.8% this year, a decrease of 0.1% from July. Emerging markets and developing economies will continue to maintain strong growth, with the economic growth forecast for 2024 being 4.2%, unchanged from the forecast in July.
The IMF pointed out that the U.S. economy is increasingly leading other developed economies, with a surge in investment bringing about an increase in productivity and wages. The IMF expects that the U.S. GDP growth rate in the fourth quarter will be 2.5% year-on-year, 0.5 percentage points higher than the forecast in July, and the forecast in July was already higher than the previous estimate. The U.S. economy grew by 3.2% in 2023. This will be the fastest growth rate among the main developed economies in the G7.
The growth expectations of major European economies have been lowered. Angel Ubide, head of global fixed income and macroeconomic research at the global hedge fund giant Citadel, told Caijing that although the European Commission has ambitious plans, it has been delaying in terms of action every year, leading to an increasing gap between the eurozone and the United States. To change this situation, the EU should invest more than 5% of GDP each year between 2025 and 2030, of course, it is also necessary to consider the macroeconomic impact on the economy of such a large increase in overall investment. The European Central Bank will have to manage a potentially more turbulent growth and inflation process and deal with various supply chain shocks.
The improvement in productivity of large U.S. companies is a major reason for the differentiation between the United States and Europe in recent years. Photo by Jin Yang.The IMF attributes the upward revision of the US economic forecast to an increase in non-residential investment and stronger consumer spending, which is supported by rising real wages. Real wages refer to wages adjusted for inflation, which tend to increase when productivity improves, as companies with higher efficiency can pay their workers more. In recent years, a significant influx of investment has entered the US, and large legislative plans have also provided financial support for green energy and infrastructure. At the same time, ample domestic supplies have largely shielded US companies from energy shortages and price shocks. Economists say that all of this has led to a surge in investment in the US, thereby increasing productivity (output per hour of work). Productivity is a major factor in improving long-term growth and living standards.
However, Tim Taschler, a wealth management advisor at Regal Advisory Services, Inc., told Caijing that the US economy appears to be slowing down, but the overall data that the Federal Reserve focuses on tends to lag and has not yet shown signs of economic slowdown. Due to delays caused by hurricanes on the East Coast, the reliability of data will be reduced.
The IMF points out that although price pressures still exist in some countries, the global battle against inflation has essentially been won. Following the overall inflation rate reaching a peak of 9.4% (on a year-over-year basis) in the third quarter of 2022, it is currently expected to drop to 3.5% by the end of next year, slightly below the average level of the 20 years before the pandemic. Inflation rates in most countries are currently near the central bank targets, paving the way for major central banks to ease monetary policy.
In the process of inflation declining, the global economy has shown extraordinary resilience. The growth rate is expected to stabilize at 3.2% in 2024 and 2025, but the downward revision of growth rate forecasts for some low-income and developing economies is significant, often related to escalating conflicts. As inflation recedes, economic growth is expected to remain stable, but the global economy needs a triple policy shift in the face of a weakening outlook and rising threats.
Inflation is declining without triggering a global recession, which the IMF calls a significant achievement. These shocks have caused the Phillips curve (which shows the relationship between economic activity and inflation) to shift upward and become steeper. As supply disruptions are alleviated and tight monetary policy begins to suppress demand, the labor market returns to normal, allowing inflation to decline rapidly while avoiding a significant slowdown in economic activity.
Clearly, the decline in inflation can largely be attributed to the alleviation of the shocks themselves, as well as improvements in labor supply (often related to increased immigration). However, monetary policy has played a decisive role, anchoring inflation expectations and avoiding harmful wage-price spirals and the recurrence of disastrous inflation of the 1970s.
The IMF points out that the return of inflation rates to near central bank targets has paved the way for a triple policy shift. In the current situation where risks and challenges remain severe, this will provide much-needed macroeconomic breathing space. The first shift is in monetary policy, which is already underway. Since June, major central banks in advanced economies have begun to cut interest rates and shift to a neutral policy stance. Many advanced economies' labor markets are currently showing signs of cooling, with rising unemployment rates. In this environment, rate cuts will support economic activity. However, so far, the rise in unemployment rates has been gradual and does not indicate an imminent slowdown in economic growth. Rate cuts in major economies will alleviate pressure on emerging market economies, their currencies will appreciate against the US dollar, and financial conditions will improve. This will help reduce imported inflation, making it easier for these countries to carry out their own inflation reduction efforts.
The second shift is in fiscal policy. Fiscal space is the cornerstone of macroeconomic and financial stability. Many countries have implemented loose fiscal policies for years, and now it is time to stabilize debt dynamics and rebuild much-needed fiscal buffers. For some countries, including the United States, the current fiscal plan does not stabilize debt dynamics. In many other countries, although early fiscal plans once brought hope after the pandemic and cost of living crisis, there are now increasing signs of a fiscal slide.
The third shift, and the most difficult one, is to implement reforms that promote economic growth. By implementing high-target domestic reforms to promote economic growth, these reforms will enhance technology and innovation, improve competition and resource allocation, promote economic integration, and encourage productive private investment.
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