IMF says inflation fight is largely over

But warns of new threats

Economy
By Editor_1
A housing development under construction in Shanghai, Sept. 18, 2024. New economic forecasts released by the International Monetary Fund on Tuesday (Oct. 22, 2024), show that the global fight against soaring prices has largely been won, but also caution that escalating violence in the Middle East and the prospect of a new round of trade wars stemming from political developments in the US, remain significant threats -Qilai Shen/The New York Times
By Alan Rappeport

WASHINGTON — The global economy has managed to avoid falling into a recession even though the world’s central banks have raised interest rates to their highest levels in years to try to tame rapid inflation, the International Monetary Fund (IMF) said Tuesday (22).

But the IMF, in a new report, also cautioned that escalating violence in the Middle East and the prospect of a new round of trade wars stemming from political developments in the United States remain significant threats.

New economic forecasts released by the Fund Tuesday showed that the global fight against soaring prices has largely been won: Global output is expected to hold steady at 3.2% this year and next. Fears of a widespread post-pandemic contraction have been averted, but the fund warned that many countries still face a challenging mix of high debt and sluggish growth.

The report was released as finance ministers and central bank governors from around the world convened in Washington for the annual IMF and World Bank meetings. The gathering will take place two weeks before a presidential election in the United States, which could result in a major shift toward protectionism and tariffs if former President Donald Trump is elected.

Trump has threatened to impose across-the-board tariffs of as much as 50%, most likely setting off retaliation and trade wars. Economists think that could fuel price increases and slow growth, possibly leading to a recession.

“Fear of a Trump presidency will loudly reverberate behind the scenes,” said Mark Sobel, a former Treasury official who is now the US chair of the Official Monetary and Financial Institutions Forum. Sobel said global policymakers would probably be wondering what another Trump presidency would “mean for the future of multilateralism, international cooperation, US-China stresses and their worldwide ripples, and global trade and finance, among others.”

That uncertainty is hanging over a global economy that has proved to be remarkably resilient during several years of turmoil.

The year-over-year global inflation rate is poised to decline to 3.5% by the end of next year from 5.3% this year. That is down from its peak of 9.4% in 2022 and would be below the average level of inflation from 2000 to 2019.

“While the global decline in inflation is a major milestone, downside risks are rising and now dominate the outlook,” Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote in the report.

The strength of the global economy continues to be driven by the United States, whose growth is outpacing that of the other advanced economies of the Group of 7 nations. Inflation has already fallen close to the Federal Reserve’s 2% goal in the United States and, as a result, the Fed has begun cutting interest rates.

The IMF upgraded its projection for output in the United States this year to 2.8% from an earlier estimate of 2.6%, as a result of stronger consumer spending and higher wages. Economic growth is projected to slow to 2.2% in 2025.

Output in the euro area remains sluggish this year at 0.8%, but the IMF estimates that growth will pick up in 2025.

Other large countries are struggling, posing risks to the global economy. Growth in China and India is poised to decline this year and next. The IMF estimates China’s output at 4.8% this year and it is expected to fall to 4.5% in 2025. Output in India is forecast to fall to 6.5% in 2025 from 7% in 2024.

The Chinese economy grew 0.9% in July through September over the previous three months, China’s National Bureau of Statistics reported last month.

China has been hampered by a meltdown in its housing market, which has slowed construction spending. Local governments are facing budget crunches, and millions of college graduates have been struggling to find work.

The IMF said there could be negative implications for the global economy if the contraction in China’s property sector becomes deeper or runs longer. That could dampen consumer sentiment in China and slow global trade.

Economists at the fund remain concerned about the toll that twin wars between Russia and Ukraine and Israel and Hamas could take on the world economy. If those wars escalate or expand into regional conflicts, they could reignite inflation by causing food and energy prices to spike, much as they did when Russia invaded Ukraine in 2022.

The repercussions of protectionist industrial policies and rising trade tensions are also a risk, which the IMF said could hurt growth and disrupt supply chains.

”Shifts toward undesirable trade and industrial policies can significantly lower output relative to our baseline forecast,” Gourinchas said. “While industrial and trade policy measures can sometimes boost investment and activity in the short run — especially when relying on debt-financed subsidies — they often lead to retaliation and fail to deliver sustained improvements in standards of living.”

-New York Times

 

 

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