IMF: A Remarkably Resilient Global Economy, but…

Economic policymakers from around the world are gathered for the Annual World Bank/IMF meetings during a particularly fraught time.  In the immediate future, the world faces the potential for a broader war in the Middle East that could lead to a spike in oil prices.  In the medium term, geo-economic fragmentation (aka  rising protectionism) could affect global growth.

According to the IMF’s most recent World Economic Outlook (WEO, April 2024, https://www.imf.org/en/Publications/WEO/Issues/2024/04/16/world-economic...),  the world economy has outperformed earlier expectations, experiencing steady growth and gradual disinflation. Global output growth, which bottomed out at 2.3% in 2022, is expected to reach 3.2% in each of 2024 and 2025.  At the same time, global inflation has slowed down as a result of favorable supply developments, a rebound in global trade and the fading of energy price shocks. However, after  a promising drop in inflation in 2023, progress on disinflation seems to have stalled.

At the same time, we see regional differences in cyclical positioning.  The United States is growing at a steady clip, possibly overheating, while the eurozone is flat and China’s economy is pulled back by a downturn in the property sector. Major EMDEs (Emerging Markets  and Developing Economies) are expanding, while the low income EMDEs are still scarred by the post-COVID downturn.

According to the WEO, risks to the global outlook are broadly balanced.  The main downside risks remain geopolitical tensions, divergences in the pace of disinflation leading to monetary policy fragmentation, faltering Chinese growth and geo-economic fragmentation. Furthermore, persistent inflation above the major central banks’ targets, in particular for the Federal Reserve Bank, the European Central Bank and the Bank of England could delay the easing of monetary policy (the Fed Chairman Jay Powell has already poured cold water on the prospects of any interest rate cuts in the near future).

The less-quoted IMF publication Global Financial Stability Report (GFS, April 2024, https://www.imf.org/en/Publications/GFSR/Issues/2024/04/16/global-financ...) states that better-than-expected data supports the prospects for a soft landing for the global economy.  However, the GFS underlines major medium-term financial risks, including the challenges facing the commercial real estate sector in major economies, the high cost of refinancing of the EMDE debt, and the fiscal challenges in the Advanced Economies, in particular the United States.  Of particular concern is the United States, where sharply rising federal debt (97% of GDP) and fiscal deficits (7.4% of GDP) in the current fiscal year are straining the U.S. debt markets.

The IMF is less sanguine about the medium-term global economic prospects: rising geo-economic fragmentation concerns and a sharp fall in long-term total factor productivity combining to dampen potential output growth.

While the IMF underscores the broad recovery of the global economy from the pandemic scarring and offers a baseline for global economic prospects, it also reminds us that the global economic picture has been profoundly changed by the pandemic and its aftermath, as well as the rise of populism and the deglobalization in the past decade.  Furthermore, the on-going crisis in the Middle East underscores the potential impact of the so-called “black swans”, (or more accurately the “grey swans”) on our planet's economic well-being.