Global Economy Remains Resilient Despite Uneven Growth, Challenges Ahead
IMF Blog, April 16, 2024
Source details
- Canonical URL
- Global Economy Remains Resilient Despite Uneven Growth, Challenges Ahead
Other formats
Bibliographic details
- Authors: Pierre-Olivier Gourinchas
- Published: April 16, 2024
Recent performance and outlook
- Global growth bottomed out at the end of 2022, at 2.3 percent, shortly after median headline inflation peaked at 9.4 percent.
- World Economic Outlook projections: growth this year and next will hold steady at 3.2 percent.
- Median headline inflation declining from 2.8 percent at the end of 2024 to 2.4 percent at the end of 2025.
- Most indicators point to a soft landing.
- Less economic scarring is projected overall, with the US economy having already surged past its prepandemic trend; more scarring is estimated for low-income developing countries.
- Resilient growth and rapid disinflation reflect fading energy price shocks, a rebound in labor supply supported by strong immigration in many advanced economies, and monetary policy actions that helped anchor inflation expectations despite potentially muted transmission due to more prevalent fixed-rate mortgages.
Inflation risks
- Bringing inflation back to target remains the priority; progress toward inflation targets has somewhat stalled since the beginning of the year.
- Key drivers of recent disinflation: decline in energy prices and in goods inflation driven by easing supply-chain frictions and a decline in Chinese export prices.
- Ongoing risks:
- Oil prices have been rising recently in part due to geopolitical tensions.
- Services inflation remains stubbornly high.
- Further trade restrictions on Chinese exports could push up goods inflation.
Economic divergences across countries
- United States:
- Strong recent performance reflects robust productivity and employment growth and strong demand in an economy that remains overheated.
- Calls for a cautious and gradual approach to easing by the Federal Reserve.
- Fiscal stance is out of line with long-term fiscal sustainability and raises short-term risks to the disinflation process and longer-term fiscal and financial stability risks.
- Euro area:
- Growth will rebound but from very low levels as past shocks and tight monetary policy weigh on activity.
- Continued high wage growth and persistent services inflation could delay return to target.
- Little evidence of overheating; ECB must carefully calibrate pivot toward monetary easing to avoid an inflation undershoot.
- Labor markets appear strong but could reflect labor hoarding if activity does not pick up.
- China:
- Economy remains affected by the downturn in its property sector.
- Domestic demand likely to remain lackluster unless strong measures address the root cause; depressed domestic demand could raise external surpluses and exacerbate trade tensions.
- Other large emerging market economies:
- Many are performing strongly, sometimes benefiting from reconfigured global supply chains and rising trade tensions between China and the US.
- Their footprint on the global economy is increasing.
Policy priorities and recommendations
- Rebuild fiscal buffers:
- Real interest rates remain high and sovereign debt dynamics have become less favorable.
- Credible fiscal consolidations can help lower funding costs, improve fiscal headroom and financial stability.
- Fiscal plans to date are insufficient and could be derailed further given the record number of elections this year.
- Recommendation: start credible, gradual multiyear consolidations now rather than waiting for market-imposed conditions; this will help pave the way for further monetary policy easing once inflation is under control.
- Reverse the decline in medium-term growth prospects:
- Some decline stems from increased misallocation of capital and labor within sectors and countries; facilitating faster and more efficient resource allocation will boost growth.
- For low-income countries: implement structural reforms to promote domestic and foreign direct investment and strengthen domestic resource mobilization to lower borrowing costs and reduce funding needs.
- Improve human capital of large young populations as the rest of the world ages rapidly.
- Harness artificial intelligence potential by improving digital infrastructure, investing in human capital, and coordinating on global rules of the road, while remaining vigilant about disruptions in labor and financial markets.
- Reverse rising geoeconomic fragmentation and the surge in trade restrictive and industrial policy measures to preserve trade linkages and global cooperation.
- Preserve strengthened policy frameworks:
- Safeguard the recent strengthening of monetary, fiscal and financial policy frameworks, especially in emerging market economies, including protecting central bank independence.
- Accelerate the green transition:
- Cutting emissions is compatible with growth; activity has become much less emission-intensive in recent decades, but emissions are still rising.
- Green investment has expanded at a healthy pace in advanced economies and China, but other emerging market and developing economies must massively increase green investment growth and reduce fossil fuel investment.
- This will require technology transfer by advanced economies and China, and substantial private and public financing.
- Emphasize multilateral frameworks and cooperation as essential for progress on these priorities.
This blog is based on Chapter 1 of the April 2024 World Economic Outlook; IMF Podcasts ยท Pierre-Olivier Gourinchas on the Global Outlook: Steady but Slow.