IMF Says 'Soft Landing' Likely

(RTTNews) - The International Monetary Fund said on Tuesday that a "soft-landing" for the world economy is likely as it lifted the growth forecast for this year citing the strong resilience in the United States and several large emerging market and developing economies, as well as fiscal support in China.

The global economy is now projected to grow 3.1 percent this year, same as in 2023, but an upgrade from the 2.9 percent expansion forecast in October, the January update to the IMF's World Economic Outlook report revealed.

The projection for 2025 was retained at 3.2 percent, the Washington-based lender said.

The forecast for 2024-25 was below the historical 2000-19 average of 3.8 percent, the IMF said. The likelihood of a "hard-landing" has receded and a "soft-landing" for the global economy was in sight, but risks remain, the report said. Global headline inflation was projected at 5.8 percent this year, same as in 2023. The outlook for next year was lowered by 0.2 percentage points to 4.4 percent.

The Final Descent

"The global economy begins the final descent toward a soft landing, with inflation declining steadily and growth holding up," IMF Economic Counselor and the Director of Research Pierre-Olivier Gourinchas said in a blog.

"But the pace of expansion remains slow, and turbulence may lie ahead."

Risks to the global growth are broadly-balanced, the IMF said. Given a further easing in the labor market tightness and decline in near term inflation expectations, disinflation could happen faster than anticipated, thus allowing central banks to ease sooner, Gourinchas said.

Meanwhile, markets appear excessively optimistic about the chances for early rate cuts, the IMF chief economist noted.

A re-assessment of views by investors could lead to an increase in the long-term interest rates and add renewed pressure on governments to implement more rapid fiscal consolidation that could weigh on economic growth, Gourinchas warned.

Further, core inflation could prove more persistent and narrowing the wide gap between the price of goods and that of services could lead to more persistent services as well as overall inflation. And wage developments, especially in the Eurozone where the trend is upward, could add to price pressures, the economist said.

U.S. Receives Upgrade, Eurozone Gets Downgrade

The latest WEO report said advanced economies set to see a modest slowing of growth this year, before an improvement next year amid a recovery in the euro area from low growth in 2023 and a moderation of growth in the United States. The 2024 growth forecast for the U.S. economy was raised sharply by 0.6 percentage points to 2.1 percent, largely due to the statistical carryover effects from the stronger-than-expected growth outcome for 2023, while the projection for next year was lowered by a percentage point to 1.7 percent. The lagged effects of monetary policy tightening, gradual fiscal tightening, and a softening in labor markets are expected to hurt demand.

Euro area's growth forecasts for both years were cut to 0.9 percent and 1.7 percent, respectively.

The recovery from an estimated 0.5 percent growth in 2023 is expected to be driven by robust household consumption as the effects of the shock to energy prices subside and inflation falls, underpinning real income growth.

Among the big four, only Italy did not receive a downgrade to the growth forecast for this year. Japan's growth projection for this year was lowered to 0.9 percent, while that for next year was raised to 0.8 percent. The U.K.'s growth forecast for this year was maintained at 0.6 percent, while that for next year was lowered to 0.4 percent. Growth projections for Canada were cut to 1.4 percent and 2.3 percent, respectively, for this year and next.

China, India & Russia

Among the emerging and developing economies, China's growth forecast for this year was raised to 4.6 percent and the projection for next year was retained at 4.1 percent. The upgrade reflects carryover from stronger-than-expected growth in 2023 and the increased government spending on capacity building against natural disasters, the IMF said.

India's growth outlook for this year and next were raised by 0.2 percentage points each to 6.5 percent, due to the resilience in domestic demand.

Russia's growth forecast for this year was raised to 2.6 percent and 1.1 percent in 2025. The upgrade reflected the carryover from stronger-than-expected growth in 2023 due to high military spending and private consumption, supported by wage growth in a tight labor market.

The IMF lowered the world trade growth outlook for this year to 3.3 percent and that for next year to 3.6 percent. That is below its historical average growth rate of 4.9 percent. Rising trade distortions and geo-economic fragmentation are set to impact the level of global trade, the lender said.

Rates On Hold Until H2 2024

The Federal Reserve, the European Central Bank, and the Bank of England are expected to leave rates unchanged until the second half of 2024, before starting to ease as inflation moves closer to targets, the IMF said. The Bank of Japan is projected to maintain an overall accommodative stance, the report added.

The IMF report also warned that fresh commodity and supply disruptions could occur in future amid the renewed geopolitical tensions, especially in the Middle East. The Red Sea conflict has led to higher shipping costs between Asia and Europe as cargoes are rerouted around Africa. "While disruptions remain limited so far, the situation remains volatile," Gourinchas said.

In what the IMF described as the biggest global election year in history, there are rising calls for increased state spending and this could delay the fiscal consolidation plans that many governments have announced for 2024-25. While an increase in public spending could boost economic activity, it could also spur inflation and increase the prospect of disruption later, Gourinchas cautioned.