Global Economy Approaches Soft Landing, but Risks Remain

IMF Blog, January 30, 2024

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Author: Pierre-Olivier Gourinchas
Date: January 30, 2024
Global growth under the baseline forecast will steady at 3.1 percent this year, a 0.2 percentage point upgrade from our October projections, before edging up to 3.2 percent next year.
Global activity proved resilient in the second half of last year, with demand and supply factors supporting major economies: stronger private and government spending on the demand side; increased labor force participation, mended supply chains, and cheaper energy and commodity prices on the supply side.
Important divergences remain: slower growth expected in the United States and China; a slight rebound in the euro area; accelerating growth in Brazil, India, and Southeast Asia’s major economies.

Excluding Argentina, global headline inflation will decline to 4.9 percent this year, down 0.4 percentage point from our October projection (also excluding Argentina).
Core inflation, excluding volatile food and energy prices, is also trending lower.
For advanced economies, headline and core inflation will average around 2.6 percent this year, close to central banks’ inflation targets.
A substantial share of recent disinflation occurred via a decline in commodity and energy prices, rather than through a contraction of economic activity.

Disinflation could happen faster than anticipated, especially if labor market tightness eases further and short-term inflation expectations continue to decline, allowing central banks to ease sooner.
Fiscal consolidation measures that governments have announced for 2024-25 may be delayed as many countries face rising calls for increased public spending in what is the biggest global election year in history; this could boost economic activity, but also spur inflation and increase the prospect of disruption later.
Rapid improvement in Artificial Intelligence could boost investment and spur rapid productivity growth, albeit one with significant challenges for workers.

New commodity and supply disruptions could occur following renewed geopolitical tensions, especially in the Middle East; shipping costs between Asia and Europe have increased markedly as Red Sea attacks reroute cargoes around Africa.
Core inflation could prove more persistent: the price of goods remains historically elevated relative to that of services; the adjustment could take the form of more persistent services—and overall—inflation. Wage developments, particularly in the euro area where negotiated wages are still on the rise, could add to price pressures.
Markets appear excessively optimistic about the prospects for early rate cuts; should investors re-assess their view, long-term interest rates would increase, putting renewed pressure on governments to implement more rapid fiscal consolidation that could weigh on economic growth.

Monetary tightening worked through additional channels beyond depressing activity: the rapid pace of tightening helped convince people and companies that high inflation would not be allowed to take hold, preventing inflation expectations from persistently rising and helping dampen wage growth; the unusually synchronized nature of the tightening lowered world energy demand, directly reducing headline inflation.
Central banks face two-sided risks: avoid premature easing that would undo credibility gains and lead to a rebound in inflation, while also pivoting toward monetary normalization in time as several emerging markets where inflation is well on the way down have started doing so already.
Sectoral strains are growing in interest rate-sensitive sectors, such as construction, and loan activity has declined markedly.

The biggest challenge is to tackle elevated fiscal risks: most countries came out of the pandemic and energy crisis with higher public debt levels and borrowing costs.
Remaining fiscal measures introduced to offset high energy prices should be phased out right away, as the energy crisis is behind us.
Two fiscal dangers: doing too little (leading to buildup of fiscal fragilities and eventual disruptive adjustment) and doing too much, too soon (which could endanger growth prospects and make it harder to address imminent fiscal challenges such as the climate transition).
Recommendation: implement a steady fiscal consolidation, with a non-trivial first installment; promises of future adjustment alone will not do. This first installment should be combined with an improved and well-enforced fiscal framework so future consolidation efforts are both sizable and credible. As monetary policy starts to ease and growth resumes, it should become easier to do more.

Emerging markets have been very resilient, with stronger-than-expected growth and stable external balances, partly due to improved monetary and fiscal frameworks.
Divergence in policy between countries may spur capital outflows and currency volatility, calling for stronger buffers in line with the Integrated Policy Framework.
Beyond fiscal consolidation, the focus should return to medium-term growth: projected global growth of 3.2 percent next year is still well below the historical average, and a faster pace is needed to address structural challenges such as the climate transition, sustainable development, and raising living standards.
Reforms that ease binding constraints to economic activity—such as governance, business regulation and external sector reform—can help unleash latent productivity gains.
Stronger growth could also come from limiting geoeconomic fragmentation, for instance by removing trade barriers that are impeding trade flows between different geopolitical blocs, including in low-carbon technology products crucially needed by emerging and developing countries.
Multilateral cooperation remains the best approach to address global challenges; progress such as the recent 50 percent increase of the Fund’s permanent resources is welcome.

IMF blog: "Global Economy Approaches Soft Landing, but Risks Remain" — Pierre-Olivier Gourinchas, January 30, 2024

January 2024 WEO Update
- January 2024 WEO Update (Markdown version)
- January 2024 WEO Update (PDF)