IMF sketches a brighter view of global economy

The International Monetary Fund has upgraded its outlook for the world economy this year, envisioning resilient growth led by the United States and a slower pace of inflation.

In its latest outlook, the 190-country lending agency said Tuesday that it now expects the global economy to grow 3.1% this year, unchanged from 2023 but better than the 2.9% it had predicted for 2024 in its previous estimate in October.

Worldwide, the IMF thinks inflation will ease from 6.8% in 2023 to 5.8% in 2024 and 4.4% in 2025. In the most advanced economies, the agency expects inflation to drop this year to 2.6% and next year to the 2% level that the Federal Reserve and some other central banks have set as a target.

The combination of steady growth and falling inflation has raised hopes for a so-called soft landing for the global economy – a slowdown sufficient to contain inflation without causing a recession.

“We are now in the final descent toward a soft landing,’’ Pierre-Olivier Gourinchas, the IMF’s chief economist, told reporters ahead of the report’s release.

The forecast for overall global growth this year and next (3.2%) trails the 3.8% average from 2000 to 2019. That is partly because the Fed and other central banks aggressively raised interest rates to fight high inflation, and the resulting higher borrowing costs have slowed spending and investment.

Gourinchas said he expects “relatively limited’’ economic damage from the attacks by Yemen-based Houthi rebels on shipping in the Red Sea. The attacks have forced container ships carrying cargo between Asia and Europe to avoid the Suez Canal and instead take the long way around the tip of Africa, thereby delaying and disrupting shipments and raising freight charges. But Gourinchas said that for now, the Red Sea disruptions don’t seem to be “a major source of reigniting supply side inflation,” which arose from far more severe shipping backlogs in 2021 and 2022.

For the United States, the world’s largest economy, the IMF sharply marked up its estimate for growth this year – to 2.1% from the 1.5% it had penciled in three months ago. The U.S. economy expanded 2.5% in 2023 after an unexpected burst of year-end growth fueled by consumers willing to spend despite higher borrowing costs.

The outlook for the slumping Chinese economy was also upgraded by the IMF. It now expects the world’s second-biggest economy to grow 4.6% this year, up from the 4.2% it had forecast in October but down from 5.2% growth in 2023. Government spending has helped offset the damage from a collapse in the Chinese housing market.

“There was a lot of resilience in many, many parts of the world,’’ Gourinchas said, singling out Brazil, India, Southeast Asia and Russia, which has remained surprisingly sturdy in the face of Western sanctions imposed after its invasion of Ukraine.

But the IMF downgraded the outlook for some places. Europe, for example, continues to struggle with dispirited consumers and the lingering effects of the energy price shock caused by the Russian invasion of Ukraine. The IMF expects the 20 countries that share the euro currency to collectively grow a meager 0.9% this year. That would be up from 0.5% growth in 2023 but down from the IMF’s October forecast of 1.2% growth for the eurozone this year.

The IMF also modestly downgraded the outlook for the Japanese economy, to 0.9%, a drop from 1.9% growth in 2023.

The improving inflation outlook is a result of higher interest rates, the end of the supply chain backlogs of the past couple of years, more workers entering the job market and lower energy prices after the spike caused by the Ukraine war. The IMF expects oil prices, which plunged 16% in 2023, to fall a further 2.3% this year and 4.8% in 2025.

The world economy still faces risks. One is that financial markets have become too confident that the Fed will reverse course and start cutting rates as early as its meeting in March. Gourinchas said he doesn’t expect the rate-cutting to start until the second half of 2024. Disappointed investors could drive down stock prices if they don’t see lower rates as soon as they hoped.

Another is that geopolitical tensions, especially between the United States and China, could disrupt world trade. Gourinchas suggested that some of President Joe Biden’s economic policies, including those that benefit American producers of computer chips and green technology, could violate World Trade Organization rules.

The IMF expects world trade to grow just 3.3% this year and 3.6% in 2025, below the historical average of 4.9%.