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IMF Says Global Economy Limping Along, Chances Of Soft Landing Increased

The International Monetary Fund downgraded the global growth forecast for next year, saying the projections are weakest in decades, while the likelihood of a soft-landing has increased with growing divergences amid modestly easing inflationary pressures.

Global growth was forecast at 3.0 percent this year, the IMF said in its October World Economic Outlook report released on Tuesday at Marrakech, Morocco, where the lender is holding its annual meeting.

That was the same as the projection in the July update to the WEO, while higher than the April forecast of 2.8 percent. The growth outlook for 2024 was lowered to 2.9 percent from 3.0 percent seen in both April and July. The projections remain below the historical average of 3.8 percent for 2000-2019, the lender said. Forecasts for the growth rate of global GDP over the medium term are at their lowest in decades, the IMF said. The lender projected 3.1 percent growth for the global economy in 2028.

“Growth remains slow and uneven, with widening divergences,” IMF Chief Economist Pierre-Olivier Gourinchas said.

“The global economy is limping along, not sprinting.”

The signs of rebound in the global economy, witnessed at the start of this year, are fading due to diminishing pandemic-era savings, slowing recovery in the services sector, including travel, and persistent slowdown in manufacturing, the report said. The IMF attributed part of the slowdown to the aggressive interest rate hikes by central banks across the world. The steady decline in global inflation from its multi-decade peak in 2022 amid tighter credit availability and cooling housing markets is evidence that those tightening efforts are paying off, the lender said.

The inflation projection for the world economy was lifted slightly to 6.9 percent from 6.8 percent seen in July. The outlook for next year was raised to 5.8 percent from 5.2 percent due to higher-than-expected core inflation. Core inflation, which excludes food and energy prices, is generally projected to decline more gradually, and inflation is not expected to return to target until 2025 in most cases, the IMF said.

Underlying inflation was forecast to decline modestly from 6.4 percent in 2022 to 6.3 percent in 2023 and 5.3 percent in 2024. The projections for both years were raised.

The stronger-than-expected momentum in the U.S. economy, but weaker-than-expected expected growth in the euro area prompted the IMF to retain the growth projection for advanced economies at 1.5 percent for this year and 1.4 percent for next year. The upgrade was attributed to stronger business investment in the second quarter and resilient consumption growth that reflect a still-tight labor market, and an expansionary fiscal stance.

“Projections are increasingly consistent with a soft landing scenario, bringing inflation down without a major downturn in activity, especially in the United States, where our forecast increase in unemployment is now modest, from 3.6 percent to 3.9 percent by 2025,” Gourinchas said. Growth forecasts for the U.S. economy for this year and next were raised to 2.1 percent and 1.5 percent, respectively. The growth outlook for Eurozone was downgraded to 0.7 percent and 1.2 percent.

Germany, the biggest euro area economy, is projected to shrink 0.5 percent this year owing to the weakness in interest-rate-sensitive sectors and slower trading-partner demand. The GDP growth outlook for France was upgraded to 1.0 percent for this year citing the catch-up in industrial production and the outperformance of external demand in the first half of 2023. Growth in the United Kingdom was forecast to fall sharply to 0.5 percent this year from 4.1 percent last year, mirroring the tighter monetary policies to curb still-high inflation and lingering impacts of the terms-of-trade shock from high energy prices. Yet, there was a 0.1 percentage point upgrade to the forecast.

Japan’s growth outlook for this year was upgraded strongly to 2.0 percent, buoyed by pent-up demand, a surge in inbound tourism, and accommodative policies, as well as by a rebound in auto exports that had earlier been held back by supply chain issues, the IMF said.

Emerging market and developing economies are forecast to log a decline in growth rate from 4.1 percent in 2022 to 4.0 percent in both 2023 and 2024, with a downward revision of 0.1 percentage point in 2024, reflecting the property sector crisis in China, the IMF said. China’s property sector crisis could deepen, with global spillovers, particularly for commodity exporters, the lender warned.

The growth outlook for China was lowered to 5.0 percent and 4.2 percent this year and next, citing the lower investment in the country amid the property sector crisis.

The growth projection for India was raised to 6.3 percent for this year, while the outlook for next year was retained at 6.3 percent. The 0.2 percentage point upward revision for this year was due to the stronger-than-expected consumption during April-June, the lender said.

The IMF expects three major central banks – the Federal Reserve, the European Central Bank, and the Bank of England – to reduce interest rates in 2024, and the changes in monetary policy globally to become less synchronous going forward.

The WEO report also said more than 80 percent of economies have seen a slowdown in their growth prospects from 15 years ago, at the time of the April 2008 WEO, the year of the global financial crisis.

Three-quarters of this reduction in global growth comes from weaker prospects for per capita GDP growth rather than merely slower population growth, the IMF said.

The latest projection of 3.1 percent growth for 2028 imply a global output loss of some 5.0 percent, with respect to pre-pandemic projections, or $6.4 trillion at 2023 prices, the WEO report said. “Dimming global growth prospects imply fewer resources available to navigate a shock-prone world and attract needed investments,” the IMF said. “Overall, based on current policies, a full recovery of global output to its pre-pandemic path is unlikely.”

The IMF report also said that world trade growth is expected to fall from 5.1 percent last year to 0.9 percent this year, before rising to 3.5 percent in 2024, well below the 2000-19 average of 4.9 percent. The projected decline this year largely reflects the path of global demand, shifts in its composition toward domestic services, lagged effects of dollar appreciation, which slows trade owing to the widespread invoicing of products in dollars; and rising trade barriers, the report added.

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