Much of the world has successfully lowered inflation and achieved a soft landing, avoiding recession, but faces rising geopolitical risks and weak long-term growth prospects. International Monetary Fund.
The agency said in its World Economic Outlook released on Tuesday that the overall global inflation rate will fall to 3.5% by the end of 2025 from an average of 5.8% in 2024. In the third quarter of 2022, the inflation rate peaked at 9.4%.
The IMF report declared that “the global fight against inflation is almost won” even as it called for a “triple pivot of policy” to address interest rates, government spending and reforms and investments to boost productivity.
“Despite the good news on inflation, downside risks are increasing and currently dominate the outlook,” said Pierre-Olivier Gurinchas, chief economist of the International Monetary Fund. The IMF warned that since Inflation is moving in the right direction, and global policymakers will face new challenges posed by the world’s economic growth rate.
The fund kept its global growth forecast for 2024 and 2025 at 3.2%, calling it “stable but lackluster.” Faster growth is now expected in the United States, and emerging economies in Asia are also likely to see strong expansion due to strong AI-related investment. But the IMF downgraded its outlook for other developed economies, especially Europe’s largest, as well as several emerging markets, blaming rising global conflicts and attendant commodity price risks.
Final stages of deflation require vigilance
The 190-member IMF, based in Washington, said in an overview that responsive monetary policy is key to lowering inflation, along with normalization of labor market conditions and easing of supply shocks, all of which could help avoid a global recession. decline.
The report warned that central banks need to remain vigilant in reducing inflation across the board. The report added that services sector inflation remains at nearly double pre-pandemic levels as wages in some countries continue to catch up with cost-of-living increases, leading to rising inflationary pressures in several emerging market economies such as Brazil and Mexico.
“While inflation is expected to hold up well this time around, the next one is likely to be more difficult as workers and businesses will be more vigilant in protecting their living standards and profits,” the report states.
Low-income countries where food and energy costs represent a larger share of household spending are also more sensitive to commodity price spikes that could lead to higher inflation. Poorer countries already face greater pressure to repay sovereign debt, which could further constrain funding for public programs.
Market volatility among key downside risks
The International Monetary Fund reports that increased financial volatility is another threat to global economic growth. The International Monetary Fund sees sudden market sell-offs, such as what happened in early August, as the main risk clouding the economic outlook. The fund said concerns remained although the market had stabilized since a brief slump in August, driven by the unwinding of yen carry trades and weaker-than-expected U.S. labor market data.
“The return of financial market volatility over the summer has stoked concerns about hidden vulnerabilities. This has heightened anxiety about the appropriate stance of monetary policy,” the report said.
Further challenges to global financial markets may arise in the final stages of the fight against inflation. If underlying inflation remains stubborn, market volatility and contagion will be a key risk – a key risk for low-income countries already under pressure from high sovereign debt and currency market volatility.
Other downside risks include geopolitical concerns, particularly conflict in the Middle East and a potential surge in commodity prices. The International Monetary Fund said the possibility of a more severe contraction in China’s real estate market, a prolonged period of excessively high interest rates and rising global trade protectionism were all threats to prosperity.
The long-term outlook is even bleaker. The International Monetary Fund predicts that by the end of the 2020s, the global economic growth rate will reach 3.1%, the lowest level in decades. While a weak outlook for China weighs on medium-term forecasts, so do worsening prospects for Latin America and Europe. Structural headwinds such as low productivity and an aging population also limit growth prospects.
The IMF warned: “An expected slowdown in the largest emerging market and developing economies means a longer path to narrowing the income gap between poor and rich countries. A slump in growth could also further exacerbate income inequality within economies.” inequality.
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