The International Monetary Fund (IMF) announced on Tuesday that the world economy will grow modestly over the next two years thanks to a slowdown in activity in the United States, a recovery in Europe and increased consumption and exports in China.
The IMF warned in an update to its World Economic Outlook (WEO) that momentum in the fight against inflation is slowing, which could further delay interest rate cuts and keep the dollar under strong pressure on developing economies.
The IMF kept its forecast for global real gross domestic product growth for 2024 unchanged at 3.2% from April, and raised its forecast for 2025 by 0.1 percentage point to 3.3%. The forecasts fail to lift growth from the lackluster levels that IMF Managing Director Kristalina Georgieva has warned would lead to “the tepid twenties.”
But the revised outlook reflected some reversals among major economies, with the U.S. growth forecast for 2024 cut by 0.1 percentage point to 2.6%, reflecting slower-than-expected consumption in the first quarter. The U.S. growth forecast for 2025 was left unchanged at 1.9%, a slowdown driven by a cooling labor market and spending moderation in response to tight monetary policy.
IMF chief economist Pierre-Olivier Gourinchas said in a blog post accompanying the report that “growth in major advanced economies is aligning as output gaps close,” adding that the United States was showing increasing signs of cooling while Europe was set to rebound.
The IMF significantly raised its growth forecast for China to 5.0% – matching the Chinese government’s target for the year – from 4.6% in April, due to a rebound in private consumption in the first quarter and strong exports. The IMF also raised its 2025 growth forecast for China to 4.5% from 4.1% in April.
Chinese irrigation
However, China’s momentum may be flagging as Beijing on Monday reported second-quarter GDP growth of just 4.7%, significantly below forecasts, due to weak consumer spending amid a prolonged property recession.
Gourinchas told Reuters in an interview that the new data pose a downside risk to the IMF’s forecasts as it points to weak consumer confidence and persistent problems in the property sector. To boost domestic consumption, China needs to fully resolve its property crisis as property is the main asset for most Chinese households.
“In China’s case, the weaker domestic demand is, the more dependent growth will be on the external sector,” he said, inviting further trade tensions.
On a more positive note, the IMF slightly upgraded its eurozone growth forecast for 2024 by 0.1 percentage points to 0.9%, while keeping the bloc’s 2025 forecast unchanged at 1.5%.
According to the IMF, the eurozone has “bottomed out” and has recorded stronger growth in services in the first half of the year, while rising real wages will help boost consumption next year and easing monetary policy will help investment.
The IMF cut Japan’s 2024 growth forecast to 0.7% from 0.9% in April, partly due to supply disruptions caused by the closure of a major auto plant and weak private investment in the first quarter.
Inflation risks persist
The IMF warned of upside risks to inflation in the near term as services prices remain high amid rising wages in labor-intensive sectors, noting that renewed trade and geopolitical tensions could fuel price pressures by raising the cost of imported goods along the supply chain.
“The risk of elevated inflation has raised the prospects that interest rates will remain high for even longer, which in turn increases external, fiscal and financial risks,” the IMF said in the report.
Gourinchas said that despite the fall in U.S. consumer prices last month, the Federal Reserve can afford to wait a little longer to start cutting rates to avoid inflationary surprises.
Risks of protectionism
The IMF also warned of possible shifts in economic policy as a result of many elections this year that could have negative repercussions on the rest of the world.
“These potential changes entail risks of fiscal profligacy that will worsen debt dynamics, with negative consequences for long-term yields and an escalation of protectionism,” the Fund said.
The fund did not name Republican candidate Donald Trump, who has proposed imposing a 10% tariff on all US imports, or Democratic President Joe Biden, who has sharply raised tariffs on Chinese electric vehicles, batteries, solar panels and semiconductors.
But he said higher tariffs and an intensification of domestic industrial policy could create “harmful cross-border spillovers, as well as trigger retaliation, resulting in a costly, mutually destructive race to the bottom.”
Instead, the IMF recommended that policymakers persevere in restoring price stability — by easing monetary policy only gradually — replenish fiscal buffers depleted during the pandemic, and pursue policies that promote trade and boost productivity.
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