The global economy is growing faster than expected, according to the International Monetary Fund's latest forecast, contradicting forecasts that fighting inflation would require a harsh downturn.
While it is likely that the world will avoid a dreaded “hard landing,” there is no boom in sight.
Global production is expected to rise 3.1 percent in 2024 for the second year in a row. That's slightly better than the fund's economists forecast in October, but is still well below the 20-year average of 3.8 percent annual growth.
The United States, China and Russia are all expected to post stronger growth than previously expected, helping to brighten the global outlook, the fund said. At the same time, global inflation is being brought under control thanks to a combination of higher interest rates and unraveling supply chains.
“We are now on the final descent towards a soft landing, with inflation steadily falling and growth continuing. But the pace of expansion remains slow and there could be turbulence,” said Pierre-Olivier Gourinchas, chief economist at the IMF.
The fund is more optimistic than its sister institution, the World Bank, which said earlier this month it expects the global economy to slow this year and end its worst half-decade since the early 1990s. For 2024, the bank expects global growth of just 2.4 percent.
In October, IMF economists feared that the higher interest rates needed to combat inflation would slow economic activity too much and plunge the world into a painful recession. But that didn't happen.
Growth in the United States and parts of developing countries such as India and Southeast Asia helps explain the improving situation, Gourinchas said.
The United States will grow at an annual rate of 2.5 percent this year, up from the 1.9 percent the fund forecast three months ago, supported by strong consumption and government spending.
The fund's economists also raised their forecast for Russia, saying the country will grow 2.6 percent annually this year, compared with the weak 1.1 percent growth forecast in October. Despite sweeping sanctions imposed by the United States and its allies in response to Russia's invasion of Ukraine, the Russian economy posted surprisingly strong growth last year, which is expected to continue.
The problems in China's debt-driven real estate sector were also not as bad as expected. The fund forecasts China to grow 4.6 percent this year, up 0.4 percentage points from the previous forecast.
The likelihood that the global economy will exceed expectations this year is as high as the disappointment, the fund's economists said.
“The balance of risks … is very different now than before. … Some of these really dire risks that we were worried about have not materialized,” said Petya Koeva Brooks, deputy director of the IMF’s research department.
Still, officials urged countries to begin repairing their finances after several years of borrowing heavily to fight the coronavirus pandemic and pay excessive bills for food, fuel and fertilizer. Higher interest rates have resulted in higher annual costs of paying off debt in most countries, particularly in developing countries.
“That is the next very important thing that lies ahead because we are concerned about the fragility on the fiscal side,” Gourinchas said.
Fund officials are also keeping an eye on the Middle East, where conflicts in Gaza and the Red Sea could spark a larger war. Attacks by Yemen's Houthi rebels on cargo ships in the Red Sea have already led to a sharp increase in transport costs.
“The broader economic impact remains limited for now,” Gourinchas said.
As tensions between the United States and China continue, fund managers remain concerned that the global economy could split into rival blocs. Nations imposed about 3,200 new trade restrictions in 2022 and another 3,000 last year, according to the IMF. In 2019, however, the new trade measures only amounted to 1,100.
“Trade measures have exploded around the world,” Gourinchas said. “And that is certainly something that has economic costs that can weigh on global growth.”
The IMF also warned against the increasing use of industrial policies to shape economic outcomes.
The Biden administration is among the most active nations in implementing such government stimulus, according to Global Trade Alert, a private group. The government is investing in new roads, bridges and ports while subsidizing semiconductor production and clean energy projects.
Such policies must be consistent with World Trade Organization requirements, the IMF said. And some of Biden’s “Buy America” provisions may not be the case.
“We are concerned that some of these measures may not be fully WTO compliant. In particular, some measures that include a local content requirement appear to be inconsistent with WTO rules,” Gourinchas said.
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