The IMF's October dispatch of its World Economic Outlook (WEO) is hot off the press, but the contents aren't as crisp and promisingly golden.
Global growth is expected to remain stable, yet underwhelming, at 3.2% in 2024 and 2025. The estimates aren't new, but have little changed since April, which is the good part. But what's upsetting is IMF's medium-term projection, which confirms that economic slowdown will likely persist like an immortal pest in the kitchen.
Forecasting five years into the future, the multi-lateral agency pegged global growth at 3.1%, which is mediocre compared to the pre-pandemic average. Again, this isn't different from its previous estimate, but disappointingly, it reiterates the crude fact that the world economy is dangled cruelly between infinite uncertainties till at least 2029. And IMF's advise is to brace up.
As it is, we just had a moderately soul-shaking year in 2023, thanks to high inflation and high interest rates. However, hopes of better economic prospects were taking shape with inflation cooling down and as the interest rate-cut era is about to begin. But WEO's latest revelations interrupt this little hopes-and-dreams sequence to bring us back to reality that uncertainty continues to determine the direction of global growth.
One of the downside risks for global growth, surprisingly, is the central banks' 'Great Tightening' episode. As price rise wreaked havoc on households, monetary authorities were seen bestriding the world like the masters of the universe, but IMF, in hindsight noted that monetary policy remaining tight for too long may end up having unintended consequences.
Besides the ghost of high interest rates, some other chicane plot reversals could drag growth: broader geopolitical tensions and regional conflicts, a possible resurgence of financial market volatility with adverse effects on sovereign debt markets, a deeper growth slowdown in China, the continued ratcheting up of protectionist policies, renewed spikes in commodity prices, intensifying debt stress in emerging market and developing economies.
Lastly, if persistent structural headwinds like aging population and weak productivity are holding back potential growth in many countries, there's extreme policy uncertainty with 64 countries, representing about half of the global population having (or will have) newly elected governments in 2024.
In other words, the world is navigating through a slow, graceful chaos and one never quite knows what will happen next.
For many countries, the five-year-ahead forecast is weaker than one-year-ahead forecast, implying a longer path to reduce the income gap between poor and rich countries. Having growth stuck in low gear could also exacerbate income inequality within economies. This is dangerous and should be avoided as, IMF analysis suggests that periods of low economic growth lasting four years or more tend to widen income inequality within countries, because of sluggish job creation and wage growth.
While 2024 and 2025 growth projections were virtually unchanged from IMF's previous estimate in July, notable cross-country revisions were visible.
In the US, 2024 growth estimate has been revised upward to 2.8%, 0.2 percentage point higher than the July forecast, on account of stronger outturns in consumption and nonresidential investment. Worryingly, growth is anticipated to slowdown to 2.2% in 2025 as fiscal policy is gradually tightened and a cooling labour market slows consumption. In the euro area, growth seems to have reached its lowest point in 2023 and is expected to pick up to a modest 0.8% in 2024 and 1.2% in 2025, helped by stronger domestic demand.
Offsetting dynamics are also at play among other advanced economies like Japan, where growth estimates are revised downward by 0.6 percentage point to 0.3% for 2024, reflecting a temporary supply disruption in the auto industry and the base effect of historical data revisions. An acceleration to 1.1 is predicted in 2025. In the UK, growth is projected to have accelerated to 1.1% in 2024 and 2025 projection is pegged at 1.5%.
Coming to emerging markets and developing economies, growth outlook is remarkably stable, hovering at about 4.2% in the next two years and steadying at 3.9% by 2026. But emerging Asia's strong growth is expected to subside from 5.7% in 2023 to 5% in 2025. The decline is led by the two largest countries -- India and China.
India's outlook for GDP growth, remains unchanged, and is likely to moderate from 8.2% in 2023 to 7% in 2024 and 6.5% in 2025. In China, despite persisting weakness in the real estate sector, and low consumer confidence, growth is projected to have slowed only marginally to 4.8% in 2024, largely thanks to better-than-expected net exports. So the forecast has been revised upwards by 0.2 percentage points in 2024 and 0.4 percentage point in 2025.
As for price rise, according to IMF, much of it was due to supply disruptions coupled with strong demand pressures in the wake of the pandemic and high commodity prices due to the Ukraine war. And this is where the WEO's startling fact hits like the furious mustard in your mouth -- the ongoing disinflation is not due to interest rate hikes, but due the unwinding of shocks themselves, followed by improvements in labor supply. Monetary policy, on the others, simply helped anchor inflation expectations, avoiding deleterious wage-price spirals.
After peaking at 9.4% in Q3, 2022, headline inflation rates are now projected to reach 3.5% by the end of 2025, below the average level of 3.6% between 2000 and 2019. Global headline inflation is expected to fall from an annual average of 6.7% in 2023 to 5.8% in 2024 and 4.3% in 2025, with advance economies returning to their inflation targets sooner than emerging market and developing economies. As global disinflation continues to progress, bumps on the road to price stability remain and further disruptions to the disinflation process, potentially triggered by new spikes in commodity prices amid persistent geopolitical tensions, could prevent central banks from easing monetary policy, which would pose significant challenges to fiscal policy and financial stability.
Most central banks stopped increasing nominal policy rates in the first half of 2023, but real policy rates continued to rise as inflation expectations started to decline, tightening the monetary policy stance further. Real policy rates are currently above the natural rates, leading to higher mortgage and lending rates. Now, the return of inflation to near central bank targets paves the way for a much-needed policy triple pivot -- easing monetary policy, fiscal consolidation and structural reforms.