Growth in the global economy is holding steady while the decline in inflation is slowing, according to new updated forecasts from the International Monetary Fund (World Economic Outlook Update).
At the same time, the IMF is ringing the bell on insufficient fiscal adjustment in many countries following the coronavirus pandemic, criticizing the US in particular for its continued debt growth that poses risks to its economy and the global economy.
The IMF forecasts global GDP to grow 3.2% this year (as with its April report) and 3.3% in 2025, marginally higher than in April.
The Eurozone is expected to grow 0.9% this year (vs. a forecast of 0.8% in April) and 1.5% in 2025, while US GDP growth is estimated at 2.6% and 1.9%, respectively.
The main engine for global growth is the emerging Asian economies, especially China and India, which account for half of global GDP growth.
However, the Fund stresses that the global outlook will remain weak for the next five years because momentum in Asian economies is expected to weaken, with China’s GDP expected to grow 3.3% in 2029.
For global inflation, it forecasts it will fall to 5.9% this year (as in April) from 6.7% in 2023 but notes a slowdown in developed economies, particularly the US.
The Fund considers the risks to its forecasts to be balanced but singles out two as the most important.
First, further problems in deflation in developed economies could prompt central banks, such as the US Fed, to keep interest rates higher for even longer. This would jeopardise overall growth, with increased upward pressure on the dollar with a negative impact on emerging and developing economies.
“The good news is that as the shocks subsided, inflation fell without a recession in the economy. The bad news is that while energy and food price inflation has almost returned to pre-pandemic levels in many countries, this is not the case for general inflation,” the Fund said as service prices rose further.
Second, the Fund stresses that fiscal problems need to be addressed more urgently as their deterioration has left many countries more vulnerable than predicted before the pandemic.
“Too little is being done, inflating uncertainty about economic policy. Projected fiscal adjustments are particularly inadequate in too many countries.
It is worrying that a country like the US, at full employment, has a fiscal stance that is pushing the debt-to-GDP ratio steadily higher, with risks to both the domestic and global economy.
The increasing reliance of the US on short-term financing is also a concern. With higher debt, slower growth and larger deficits, it would not take much to make debt paths less comfortable, with risks to financial stability,” the IMF says.
