IMF expects ‘soft landing’ for global economy in 2024

The global economy is on track for a “soft landing” as steady growth and moderating inflation boost financial conditions and permit “real incomes to recover”, the International Monetary Fund (IMF) has said.

In its latest global outlook report, the Washington-based fund said the global economic recovery from Covid-19, Russia’s invasion of Ukraine and the cost-of-living crisis is proving “surprisingly resilient”.

Inflation had come down quicker than expected with less of a toll on employment and activity, reflecting favorable supply-side developments and tightening by central banks, which has also kept inflation expectations anchored, it said.

“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,” Pierre-Olivier Gourinchas, the IMF’s chief economist, said.

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The fund upgraded its global growth forecast to 3.1 per cent this year, 0.2 per cent higher than its previous forecast, and 3.2 per cent in 2025, on account of greater-than-expected resilience in the US and several large emerging market and developing economies, as well as fiscal support in China.

Nonetheless, it said the forecast for 2024 and 2025 was below the historical average of the previous decade (3.8 per cent).

It also warned that new commodity price spikes from geopolitical shocks – including continued attacks in the Red Sea – and supply disruptions or more persistent underlying inflation could prolong tight monetary conditions.

“Deepening property sector woes in China or, elsewhere, a disruptive turn to tax hikes and spending cuts could also cause growth disappointments,” the organisation said.

The IMF said growth in the euro area was projected to recover from its low rate of an estimated 0.5 per cent in 2023, which reflected the continent’s exposure to the war in Ukraine, to 0.9 per cent in 2024 and 1.7 per cent in 2025.

“Stronger household consumption as the effects of the shock to energy prices subside and inflation falls, supporting real income growth, is expected to drive the recovery [in Europe],” it said.

In the US, growth is projected to fall from 2.5 per cent in 2023 to 2.1 per cent in 2024 and 1.7 per cent in 2025, as the lagged effects of monetary policy hit home and labour markets “soften”.

In its report, the IMF highlights the moderation in inflation, saying it expects headline price growth across the global economy to fall to 5.8 per cent this year and 4.4 per cent in 2025 from 6.8 per cent in 2023. It estimated that 80 per cent of the world’s economies will experience lower inflation this year.

“Diminished inflation reflects the fading of relative price shocks – notably those to energy prices – and their associated pass-through to core inflation,” it said.

The squeeze from higher interest rates had resulted in “high mortgage costs, challenges for firms refinancing their debt, tighter credit availability, and weaker business and residential investment”.

Commercial real estate has been especially hit, it said with higher borrowing costs compounding post-pandemic structural changes relating to a greater incidence of remote working and lower office demand.

On geopolitical risks, it warned the conflict in Gaza and Israel could escalate further into the wider region, which it noted produced about 35 per cent of the world’s oil exports and 14 per cent of its gas exports.

“Continued attacks in the Red Sea – through which 11 per cent of global trade flows – and the ongoing war in Ukraine risk generating fresh adverse supply shocks to the global recovery, with spikes in food, energy, and transportation costs,” it said.

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