The IMF says policymakers must act now to revitalize growth prospects.
advertisementThe IMF’s latest World Economic Prospects report projects global economic growth to be 3.2% in 2024 and 3.3% in 2025, in line with its April forecast.
But the group noted that shifts in economic activity toward the end of the year had narrowed some of the divergence in output and reduced the gap in growth rates between countries.
The report noted that the deflationary process increases the risk of causing price increases and “increasing the likelihood that interest rates will remain elevated for a longer period.”
One such risk is escalating trade tensions, which could increase the cost of imported goods through supply chains.
Petya Koeva-Brooks, Deputy Director of Research at the International Monetary Fund (IMF), elaborated on this trend in an interview with Euronews.
“Another interesting phenomenon we see is growing evidence of trade fragmentation. We find that trade within politically close blocs has held up well, compensating for the fact that trade between blocs has actually declined.”
The warning comes despite a strong start to the year in trade, boosted by strong exports from Asia, particularly in the technology sector.
When asked about recent tariffs imposed by the US and EU on Chinese goods, Koeva-Brooks was critical.
“Such measures typically have adverse effects not only on the country that imposes them but also on others. While some may be for legitimate reasons, we urge countries to seek to resolve such grievances in a multilaterally compatible manner rather than through such unilateral measures.”
The European Commission has imposed temporary tariffs of up to 37.6% on electric vehicles imported from China.
In May, the US announced it would impose 100% tariffs on Chinese-made electric vehicles.
Signs of economic recovery
The IMF said it was seeing early signs of economic recovery in Europe and elsewhere, led by an improvement in services activity – by which we mean intangible services rather than tangible goods.
Koeva Brooks noted that this partly reflects a natural shift in demand following the pandemic.
During the lockdown, consumption of goods surged while service activity stagnated, then as social distancing restrictions were eased, demand for services surged again.
The IMF said consumption was similarly driven by rising real wages and increased investment due to easier financial conditions.
advertisementEurozone growth is expected to rise to 1.5% in 2025, with a more moderate increase of 0.9% expected in 2024.
The report stressed that a “more moderate” recovery is expected in Germany, which was hit hard by the energy price shock due to its high reliance on fuel-intensive industries.
The country’s year-over-year growth rate is projected to be 1.3% in 2025, but is estimated at 0.2% in 2024. This follows a 0.2% contraction last year.
Slowing global deflation
Growth will recover but at the risk of a sharp rise in inflation, the IMF warned.
advertisementAs a result, policymakers may feel forced to postpone interest rate cuts.
“The continued rise in U.S. inflation in the first quarter has delayed policy normalization,” the IMF said.
“This has allowed other advanced economies, such as the euro area and Canada, where underlying inflation has been slower than expected, to get further ahead in their monetary easing cycles than the United States. At the same time, many emerging market central banks have remained cautious about cutting interest rates due to external risks posed by shifts in interest rate differentials and the associated depreciation of their currencies against the dollar.”
Product Price
The World Economic Outlook report also noted that the IMF staff projections are based on an upward revision of commodity prices, including a 5 percent increase in non-fuel prices in 2024.
advertisementEnergy commodity prices are expected to fall about 4.6% in 2024, lower than levels projected in April. The deviation reflects higher oil prices following production cuts by OPEC+ (the Organization of the Petroleum Exporting Countries, which includes Russia and other non-OPEC oil exporters), as well as price pressures from conflicts in the Middle East.
Increased activity in China
The IMF also upgraded its growth forecasts for emerging market and developing countries, due to stronger economic activity in Asia, particularly China and India.
Koeva Brooks said these two countries “account for about half of global economic growth”.
China’s forecast for 2024 is 5%, while India’s projected year-on-year change is 7%.
advertisementAsked about disappointing Chinese GDP data released earlier this week, Koeva Brooks said it “may pose a downside risk to our current forecasts.”
China’s economy grew 4.7% in the second quarter from a year earlier, below expectations.
“The key for China is to address the problems in the real estate market,” Koeva-Brooks said. “That will bring confidence to consumers.”
Policy Recommendations
The report warns that in countries where the risk of rising inflation is apparent, “central banks should refrain from prematurely easing interest rates.”
advertisementShort-term challenges aside, countries must also aim to accelerate their weak medium-term growth prospects.
According to the IMF, one solution is to increase labor productivity by better integrating women and immigrants into the workforce.
“The migration of young and educated people can place a strain on sending countries, but these costs can be mitigated. Policies that leverage migrant networks, maximize the benefits of remittances, and expand domestic labor market opportunities are possible measures.”
The group also stressed the importance of multilateral cooperation not only to promote trade but also to tackle global challenges, especially the climate crisis.
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