WHAT THE IMF WEO SAY ABOUT GLOBAL GROWTH

The International Monetary Fund (IMF) presents its biannual World Economic Outlook in April and October each year. Additionally, these projections are also updated in July and January each year, giving an idea of ​​how the projections have changed compared to the original projection. Overall, calendar 2022 was a strong year across the board. This was hardly surprising since the rebound came from post-pandemic lows. However, growth moderated globally in 2023 and is expected to face further pressures in 2024 and 2025. The table below shows the IMF’s real GDP growth projections for the world’s major economies as well as as the evolution compared to July 2024, updated according to these projections. projections.

Data source: IMF World Economic Outlook (WEO)

What are the main takeaways from the IMF’s World Economic Outcome (WEO) report?

• The world’s largest economy has seen improvement in recent months, despite fears of a hard landing triggered by the 4.3% U.S. unemployment rate. For the United States, the real GDP growth projection for 2024 has been revised upwards to 2.8%. In July, the forecast was 2.6%. This growth will likely be triggered by consumption and non-residential investment. The sharp increase in real wages led to an increase in consumption.
• Let us turn to the Eurozone. The EU region saw growth at its lowest level in several years, of just 0.4% in 2023. This figure is also lower than the previous projection. Even in the EU region, the increase in consumption is the result of rising real wages against a backdrop of gradual easing of monetary policy. However, manufacturing weakness in major economies like Germany and Italy is real.
• Compensatory dynamics are also at work in other developed economies such as Japan and the United Kingdom. In 2024, Japanese growth is expected to weaken due to supply disruptions and the normalization of the tourism boom. Disruptions in the automotive industry are also likely to affect Japan. In the UK, GDP growth is expected to have posted a positive growth rate amid falling inflation and falling rates boosting demand.
• On the other hand, the IMF report expects that the two main engines of Asian growth (China and India) will see their growth stabilize in the coming quarters. Of course, India is expected to do even better than China, which is struggling with a prolonged real estate crisis. Emerging Asia, comprising India and China, is expected to see growth fall from 5.4% in calendar year 2023 to 5.4% in 2024, then to 5.0% in calendar year 2025. The decline in real GDP growth is expected to be more pronounced in India; where real GDP growth is expected to fall from 8.2% in 2023 to 7.0% in 2024 and again to 6.5% in 2025.
• The RBI estimates GDP growth in 2024 at over 7.2%; but the slowdown is there. This is largely because the pent-up demand that had built up during the pandemic has now been exhausted. In the case of China, the slowdown will likely be more gradual, despite weakness in the real estate sector and low consumer confidence. For the full year 2024, real GDP growth is expected to have slowed from 5.4% to 4.5%, but is expected to rebound to 4.7% in calendar year 2025 thanks to a positive accumulation of net exports.
• Among Latin America’s major emerging markets, Brazil (a key BRICS member) is expected to rebound from 2.2% in 2023 to 3.5% in 2024, although growth is also expected to fall back to 2023 levels in 2025. The upward revision in 2024 is largely explained by stronger private consumption and investment in the first half of the year due to a tight labor market, government transfers and limited disruption from flooding. Brazil’s monetary policy remains restrictive, which risks slowing growth in 2025. Let’s turn to Mexico. Here, GDP growth is expected to decline from 2.3% in 2023 to 1.3% in 2024 and slightly higher at 1.4% in 2025. Among emerging African countries, Nigeria is a country expected to maintain growth average of 3.5% between calendar years. years 2023 and 2025.
• Let us finally turn to the two main emerging European economies, viz. Russia and Türkiye. In the case of Russia, growth is expected to decline from 3.6% in 2023 to 3.2% in 2024 and then to 2.2% in 2025. In the context of sanctions and the prolonged war with Ukraine, Russia is facing a slowdown in consumption and investment. Wage growth has also been slower in Russia, with labor supply now outstripping demand. Concerning Turkey, which experienced good growth of 5.1% in 2023, it is expected to slow down to 2.7% in 2025. Turkey has tightened its fiscal and monetary policy; and this risks weighing heavily on the growth of its real GDP.

To summarize the IMF’s outlook on the World Economic Outlook, there are real risks to global growth over the next two years.

INFLATION REMAINS THE JOKER IN THE PACK

Since 2022, the great challenge facing the global economy has been galloping inflation. The galloping inflation since the end of 2021 was the combination of two factors. On the one hand, there has been a strong recovery in demand after the pandemic, with governments around the world injecting billions of helicopter money into public wallets. It was the demand side. But the most pernicious impact has been on the supply side. Supply chains, hit hard by the pandemic, took much longer to recover and return to normal. This interim period led to high inflation globally. It only began to decline after central banks around the world adopted extremely hawkish policies to bring down inflation. Now let’s move on to the inflation outlook given by the IMF WEO, October 2024.

The decline in inflation in advanced and developing markets has been palpable in recent years. However, the last kilometer was difficult (as expected). So while inflation is expected to fall further, progress would be gradual and spasmodic. In fact, global headline inflation is expected to fall from 6.7% in 2023 to 5.8% in 2024 and then to 4.3% in 2025. However, a dichotomy would remain as the disinflation process is expected to be more rapid in advanced economies. For example, average inflation in advanced economies is expected to decline from 4% to 2% in 2024 and remain stable at 2% in 2025 as well. In contrast, in emerging markets, headline inflation is expected to fall from 8.1% in 2023 to just 7.9% in 2024, and then to 5.9% in 2025. Even in the case of India, while inflation has fallen; it remains very vulnerable to domestic food inflation and the risk of imported inflation in a context of growing geopolitical risks.

However, we need to calibrate our understanding of emerging markets. For example, Asia is expected to see falling inflation comparable to advanced economies, but the same cannot be said for emerging markets in Africa or Latin America. Inflation in emerging Asian countries is expected to reach 2.1% in 2024 (on par with advanced economies); but it is expected to reach 2.7% in 2025. In contrast, inflation forecasts in the Middle East, Africa and Eastern Europe are expected to be in double digits. In the Latin American economies of Brazil and Mexico; Strong wage growth prevents faster disinflation in the services sector.

But the real good news about the inflation outlook lies in the triggers for lower inflation. For example, if the decline in inflation in 2023 was due to falling fuel prices, the decline in inflation in 2024 and 2025 would likely be triggered by a decline in core inflation. This is a positive factor since core inflation is generally known to be a tougher candidate. Most advanced and emerging markets in Asia are expected to see inflation stabilize around their target levels by 2025 only. Even in the Indian context (according to the IMF report), most of the inflation volatility has been triggered by food and fuel; while core inflation is now well below the RBI’s long-term target of 4% headline inflation.

IS THE WORLD ECONOMY MOVING TOWARDS A REGIME OF LOW GROWTH?

This is the million dollar question and the answer may be yes. Like it or not, global economies may need to prepare for lower levels of growth in coming quarters. In the current context, the possibilities for structural reforms are limited; which normally propels GDP growth to a completely different level. By 2025, the IMF report predicts that most of the world’s economies will likely return to neutral monetary policy. The 5-year forecast is lower than the 1-year forecast.

This is therefore what is likely to slow down real GDP growth in the medium term. There are demographic realities such as the aging of the population. In the manufacturing sector, production growth will likely be hampered by weak investment and historically low growth in total factor productivity. Real GDP growth in the global economy is estimated at 3.1% over the next five years, clearly showing signs of strain. Among advanced economies, the United States and the United Kingdom are expected to experience above-average growth in the coming years, while Japan and the Eurozone are expected to be under pressure.

According to the IMF’s World Economic Outlook, “for emerging and developing economies, medium-term growth prospects have not improved compared to those of April 2024. This partly reflects the lingering scars of shocks in recent years where these emerging economies economies have been much more vulnerable. In short, India may have already seen the best post-pandemic growth in the last three years and the only way forward may be for Indian growth to normalize to lower levels!