IMF: moderating inflation and steady growth open path to soft landing

IMF growth forecasts

The IMF forecasts global real GDP growth of 3.1% and 3.2% respectively in 2024 and 2025 (see Table 1). The projection for 2024 is 0.2 percentage points above its October forecast and in line with estimated world output growth in 2023.¹ This reflects an improved outlook for the US and several emerging market (EM) economies. At the headline level, the projection for 2025 is unchanged.

Table 1. IMF’s World Economic Outlook real GDP growth projections (% change, year-on-year) 

Source: IMF. Data as at 30 January 2024.

In advanced economies, the IMF projects growth to decline from 1.6% in 2023 to 1.5% in 2024, before rising to 1.8% in 2025. The 0.1 percentage point upward revision for 2024 is largely attributed to a 0.6 percentage point improvement in the growth projection for the US. This is partially offset by a 0.3 percentage point downward revision to the forecast for eurozone real GDP growth.

The upward revision for the US for 2024 reflects momentum from stronger than expected growth in 2023. Nonetheless, the IMF still expects the US economy to slow over the next two years as the lagged effects of interest rate increases, fiscal tightening, and a softening in labour markets weigh on aggregate demand.

In contrast with the US, the IMF’s growth forecast for the eurozone has been reduced for 2024 due to weaker-than-expected momentum from 2023. However, growth is still projected to pick up from 2023 as falling inflation boosts household consumption. Notably, large divergencies within the eurozone remain. Germany, for example, is forecast to grow 0.5% this year, having contracted by 0.3% in 2023. Instead, the IMF expects Spanish real GDP to rise by 1.5% in 2024 after 2.4% last year. In general, the IMF sees Southern European economies experiencing stronger real GDP growth than their Northern counterparts.

In EM economies, the IMF expects real GDP growth to remain at 4.1% in 2024 before rising slightly to 4.2% in 2025. Both years’ forecasts represent a 0.1 percentage point increase relative to the projections in the October WEO. The IMF forecasts growth of 4.6% and 6.5% in China and India respectively in 2024. Both numbers represent upward revisions and reflect the IMF’s expectations for stronger government spending in China and domestic consumption in India.

Risks to the outlook

The IMF believes that risks to the global outlook are balanced. One factor that could result in stronger global growth is an acceleration in disinflation. A stronger pass-through of decreasing energy prices and further abatement of inflationary pressures would encourage central banks to cut interest rates, supporting growth.

Conversely, the IMF notes that geopolitical and weather-related shocks could trigger spikes in commodity prices, impeding the trend of global disinflation. Tensions in the Middle East, the war in Ukraine, and extreme weather events exacerbated by the El Niño phenomenon, could cause a surge in energy and food prices. The resultant higher inflation would pose a downside risk to real GDP growth.

Furthermore, sticky core inflation could lead financial markets to adjust expectations for interest rate cuts. In the IMF’s view, this could increase market volatility, cause a tightening of global financial conditions and a strengthening of the US dollar, negatively impacting global trade and growth.

According to the IMF, there is a possibility of governments withdrawing fiscal support more slowly than assumed into 2025, leading to higher global growth in the short term. However, this would raise the risk of a resurgence in inflation, and with current high levels of public debt, could cause higher borrowing costs, impacting global growth in the future.

Tighter fiscal policy is another factor the IMF envisages as a downside risk to real GDP growth. Governments could rapidly shift to austerity measures to reduce rising debt ratios, dampening the growth outlook. Emerging market economies and low-income countries are at higher risk of debt distress and are held back from pursuing growth-friendly policies.

The IMF views China as both an upside and downside risk to global growth. China’s current structural problems are well-known (see notes).² Stronger than expected real GDP growth in China will support the global economy. However, if Beijing is unable to deploy a meaningful stimulus package for the faltering property sector, the IMF believes economic activity will likely slow further.

Harnessing the potential of artificial intelligence could boost productivity (see EFG's Outlook 2024).³ The IMF notes that advanced economies are more likely to benefit from AI productivity gains than EM economies due to a labour market structure that is more aligned on cognitive-intensive roles. An acceleration of supply-enhancing reforms in countries with constrained policy environments could contribute to higher levels of investment and productivity, a potential catalyst for higher global real GDP growth.

In conclusion, the global growth outlook appears positive relative to the previous WEO but remains fragile. If the IMF’s baseline projections materialise, the stronger growth picture would likely be supportive of asset prices. Continued disinflation remains at the forefront of potential upside risks to growth. However, adverse inflationary shocks stemming from geopolitical and extreme weather events, and monetary policy mistakes could drag on global growth. China’s policy response to its challenges remains key, with risks distributed on both the upside and downside.

* https://go.pardot.com/e/931253/ic-outlook-update-january-2024/3x82v/325004536/h/hipm035lgLTs0UKzTB28cInKZtgYYsub5Yu7HuS3Fhw
1 https://go.pardot.com/e/931253/-economic-outlook-october-2023/3x82y/325004536/h/hipm035lgLTs0UKzTB28cInKZtgYYsub5Yu7HuS3Fhw
2 See EFGAM Macro Flash Note, ‘China: a year of base effects and property sector deleveraging’ (January 2024): https://go.pardot.com/e/931253/perty-sector-deleveraging-html/3x832/325004536/h/hipm035lgLTs0UKzTB28cInKZtgYYsub5Yu7HuS3Fhw and, ‘China’s Impossible Trilogy’ (August 2023): https://go.pardot.com/e/931253/chinas-impossible-trilogy-html/3x835/325004536/h/hipm035lgLTs0UKzTB28cInKZtgYYsub5Yu7HuS3Fhw
3 https://go.pardot.com/e/931253/nsights-2023-2024-outlook-html/3x838/325004536/h/hipm035lgLTs0UKzTB28cInKZtgYYsub5Yu7HuS3Fhw