The IMF increased its prediction for 2025 by 0.1 percentage points to 3.3% while maintaining its April estimate for the real gross domestic product growth in 2024 at 3.2%.
The International Monetary Fund (IMF) predicted on Tuesday that the global economy will grow modestly over the next two years due to decreasing activity in the United States, a bottoming out in Europe, and greater consumption and exports in China. However, there are several challenges to this forecast.
In a recent update to its World Economic Outlook (WEO), the IMF issued a warning, stating that the pace of progress in the battle against inflation is slowing. This might cause interest rate lowering to be further delayed and maintain significant dollar pressure on developing economies.
The IMF increased its prediction for 2025 by 0.1 percentage points to 3.3% while maintaining its April estimate for the real gross domestic product growth in 2024 at 3.2%. Forecasts fail to move growth away from the drab levels that, according to IMF managing director Kristalina Georgieva, would send the country into “the tepid twenties.”
The updated prediction for 2024 U.S. growth, which was lowered by 0.1 percentage point to 2.6% due to lower-than-expected first-quarter consumption, however, showed some shifting sands among the big economies. The Fund maintained its 1.9% growth estimate for the United States through 2025, citing a slowdown in the labour market and a reduction in spending as a result of tight monetary policy.
In a blog post that accompanied the study, IMF Chief Economist Pierre-Olivier Gourinchas stated, “Growth in major advanced economies is becoming more aligned as output gaps are closing.” He also mentioned that Europe was about to pick up, while the U.S. was beginning to show indications of cooling.
Due to a first-quarter rebound in private spending and robust exports, the IMF dramatically raised its China growth prediction from 4.6% in April to 5.0%, which matches the Chinese government’s annual target. Additionally, the IMF raised its estimate of China’s growth in 2025 from 4.1% in April to 4.5%.
However, Beijing’s announcement on Monday of second-quarter GDP growth of just 4.7%, well below predictions due to weak consumer spending and a prolonged property slowdown suggests that China’s momentum may be faltering.
In an interview with Reuters, Gourinchas stated that the latest data indicates a decline in consumer confidence and ongoing issues in the real estate market, which might put the IMF prediction at danger. Since real estate comprises the majority of Chinese consumers’ assets, China must properly fix its property problem in order to stimulate domestic demand.
He raised the possibility of further trade conflicts when he stated, “When you’re looking at China, the weaker the domestic demand, the more growth is going to rely potentially on the external sector.”
Positively, the IMF revised up its growth estimate for the eurozone in 2024 by 0.1 percentage points to 0.9%, while the bloc’s estimate for 2025 remained at 1.5%
The eurozone has “bottomed out” and seen improved first-half services growth, according to the IMF. Additionally, growing real earnings will support power consumption in 2019 and monetary policy easing will support investment.
Japan’s GDP estimate for 2024 was lowered from 0.9% in April to 0.7% because of supply disruptions brought on by the closure of a significant car plant and low private investment in the first quarter.
The IMF noted that continued trade and geopolitical tensions might fuel prices pressures by driving up the cost of imported goods along the supply chain, and that there are near-term upside risks to inflation as long as services prices remain high notwithstanding wage growth in the labour-intensive sector.
“The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal and financial risks,” the International Monetary Fund stated in its report.
Despite a decline in US consumer prices last month, according to Gourinchas, the Federal Reserve can afford to hold off on raising interest rates for a little while longer in order to prevent any unexpected spikes in inflation.
The IMF also issued a warning against possible changes in economic policy brought on by this year’s several elections, which might have unfavourable effects on the rest of the world.
“These potential shifts entail fiscal profligacy risks that will worsen debt dynamics, adversely affecting long-term yields and ratcheting up protectionism,” the International Monetary Fund stated.
The Fund did not include Democratic President Joe Biden, who has significantly increased duties on Chinese electric vehicles, batteries, solar panels, and semiconductors, or U.S. Republican Party contender Donald Trump, who has suggested placing a 10% tariff on all imports into the country.
However, the report also warned that a strengthening of domestic industrial policy and increased tariffs would lead to “damaging cross-border spillovers, as well as trigger retaliation, resulting in a costly race to the bottom.” Rather than giving up on restoring price stability and loosening monetary policy too quickly, the IMF advised authorities to rebuild the budgetary buffers they had depleted during the pandemic, pursue trade-friendly measures, and boost productivity.
