Much of the world has succeeded in lowering inflation, engineering a soft landing, and avoiding recession, but faces increasing geopolitical risks and weaker long-term growth prospects, according to the International Monetary Fund.
The agency said in its World Economic Outlook report issued on Tuesday that global headline inflation will fall to 3.5% on an annual basis by the end of 2025, from an average of 5.8% in 2024. Inflation peaked at an annual rate of 9.4% in the quarter. 3rd of 2022. The year-end rate for 2025 is slightly lower than the average annual price rise in the two decades prior to the Covid-19 pandemic.
“The global battle against inflation is almost over,” the IMF report cheered, even as it called for a “triple policy axis” to address interest rates, government spending, reforms and investment to boost productivity.
“Despite the good news on inflation, downside risks are increasing and now dominate the outlook,” said Pierre-Olivier Gorinchas, chief economist at the International Monetary Fund. The International Monetary Fund warned that now that inflation is moving in the right direction, global policymakers face a new challenge stemming from the growth rate in the global economy.
The Fund maintained its global growth estimate at 3.2% for 2024 and 2025, which it described as “stable but disappointing.” The United States is now expected to grow faster, and strong expansions in emerging Asian economies are also likely as a result of strong AI-related investments. But the IMF cut its forecasts for other advanced economies – particularly major European countries – as well as many emerging markets, blaming increasing global conflicts and the resulting risks to commodity prices.
Vigilance is required in the final stage of contraction
The Washington-based International Monetary Fund, which has 190 member countries, said in its overview that responsive monetary policy was key to lowering inflation while labor market conditions normalized and mitigated supply shocks, all of which helped avert a global recession.
The report warned that central banks would need to remain vigilant to fully reduce inflation. He added that services inflation remains close to double pre-pandemic levels as wages in some countries continue to catch up with the increase in the cost of living, leading many emerging market economies such as Brazil and Mexico to see an uptick in inflationary pressures.
“While inflation expectations have held up well this time, it may be more difficult next time, as workers and businesses will be more vigilant in protecting their living standards and earnings going forward,” the report said.
Low-income countries, where food and energy costs account for a larger share of household expenditures, are also more sensitive to sharp rises in commodity prices that could lead to higher inflation. Poor countries are already under greater pressure to repay sovereign debt, which may further restrict financing of public programmes.
Market volatility is among the main downside risks
The IMF report said that increasing financial volatility poses another threat to global growth. The International Monetary Fund has cited sudden market sell-offs, such as the one that occurred in early August, as a key risk to the economic outlook. Although markets have stabilized since a brief slump in August, driven by weaker yen carry trades and weaker-than-expected US labor market data, concerns remain, according to the fund.
“The return of volatility in financial markets over the summer has raised long-standing concerns about hidden vulnerabilities. This has led to increased concerns about the appropriate stance of monetary policy,” the report said.
More challenges facing global financial markets could come in the final phase of the battle against inflation. Market turbulence and contagion pose a major risk if core inflation remains stubborn – a risk that is critical for low-income countries already stressed by high sovereign debt and currency market volatility.
Other downside risks include geopolitical concerns, particularly conflict in the Middle East and potential rises in commodity prices. The IMF said a potential deeper downturn in China's real estate market, interest rates remaining too high for too long, and rising protectionism in global trade are other threats to prosperity.
The outlook looks bleaker in the long term. The International Monetary Fund expects global growth to rise by 3.1% annually by the end of the 2020s, the lowest level in decades. While a weaker outlook for China weighs on the medium-term outlook, deteriorating outlooks in Latin America and Europe are also impacting the outlook. Structural headwinds, such as declining productivity and an aging population, also limit growth prospects.
The International Monetary Fund warned: “The expected slowdown in the largest emerging market and developing economies implies a longer path to closing income gaps between poor and rich countries. Remaining at a low pace of growth could also exacerbate income inequality within economies.”
