Much of the world has managed to lower inflation and achieve a soft landing, avoiding recession, but faces rising geopolitical risks and weak long-term growth prospects. International Monetary Fund.
The agency said in its World Economic Outlook released on Tuesday that overall global inflation will fall to 3.5% by the end of 2025 from an average of 5.8% in 2024. In the third quarter of 2022, the inflation rate peaked at 9.4%. Inflation at the end of 2025 is slightly below the average annual price rise in the two decades before the Covid-19 pandemic.
The IMF report declared that “the global fight against inflation is almost won” even as it called for a “triple pivot of policy” to address interest rates, government spending and reforms and investments to boost productivity.
“Despite the good news on inflation, downside risks are increasing and currently dominate the outlook,” said Pierre Olivier Gurinchas, chief economist of the International Monetary Fund. The International Monetary Fund warned that since inflation Moving in the right direction, global policymakers are faced with new challenges posed by the growth rate of the world economy.
The fund kept its global growth forecast for 2024 and 2025 at 3.2%, calling it “stable but lackluster.” Faster growth is now expected in the United States, and emerging economies in Asia are also likely to see strong expansion due to strong AI-related investments. But the IMF downgraded its outlook for other advanced economies, especially Europe’s largest, as well as several emerging markets, blaming rising global conflicts and attendant commodity price risks.
Final stages of deflation require vigilance
The 190-member IMF, based in Washington, said in its overview that responsive monetary policy is key to lowering inflation, along with normalization of labor market conditions and easing of supply shocks, all of which could help avoid a global recession. decline.
The report warned that central banks need to remain vigilant in reducing inflation across the board. Services inflation remains at nearly double pre-pandemic levels as wages in some countries continue to catch up with cost-of-living increases, leading to rising inflationary pressures in several emerging market economies such as Brazil and Mexico, the report added.
“While inflation expectations remain well anchored this time around, it may be more difficult next time as workers and businesses will be more vigilant in protecting their living standards and profits going forward,” the report said.
Low-income countries where food and energy costs represent a larger share of household spending are also more sensitive to commodity price spikes that could lead to higher inflation. Poorer countries already face greater pressure to repay sovereign debt, which could further constrain funding for public projects.
Market volatility among key downside risks
The International Monetary Fund reports that increased financial volatility is another threat to global economic growth. The International Monetary Fund sees sudden market sell-offs, such as what happened in early August, as the main risk clouding the economic outlook. The fund said concerns remained despite markets stabilizing since a brief slump in August, driven by the unwinding of yen carry trades and weaker-than-expected U.S. labor market data.
“The return of financial market volatility over the summer has stoked concerns about hidden vulnerabilities. This has heightened anxiety about the appropriate stance of monetary policy,” the report said.
Further challenges to global financial markets may arise in the final stages of the fight against inflation. If underlying inflation remains stubborn, market volatility and contagion is a key risk – a key risk for low-income countries already facing pressures from high sovereign debt and currency market volatility.
Other downside risks include geopolitical concerns, particularly conflict in the Middle East and a potential spike in commodity prices. The International Monetary Fund said that the possibility of a more severe contraction in China’s real estate market, excessively high interest rates for a long time and the rise of global trade protectionism are all threats to prosperity.
The long-term outlook is even bleaker. The International Monetary Fund predicts that global economic growth will reach 3.1% by the end of the 2020s, the lowest level in decades. While a weak outlook for China weighs on medium-term forecasts, so do worsening prospects for Latin America and Europe. Structural headwinds such as low productivity and an aging population also limit growth prospects.
The IMF warns: “An expected slowdown in the largest emerging market and developing economies means a longer path to narrowing the income gap between poor and rich countries. Slowing growth could also further exacerbate income inequality within economies. Unequal.”
