In an environment of decelerating inflation and steady growth, the likelihood of a hard landing has diminished, with risks to global growth being broadly balanced.
The resilient labor market in the United States has supported strong consumer spending in 2023, dispelling concerns of a recession. Photo by Jin Yan, a reporter from Caijing.
On January 30th local time, the International Monetary Fund (IMF) released its latest World Economic Outlook report. The institution believes that with slowing inflation and steady growth, the global economy is on a path towards a soft landing.
The IMF considers that the global economy is expected to achieve a soft landing this year. Photo by Jin Yan, a reporter from Caijing.
The report states that despite facing political crises, the global economy is showing more resilience than expected. The IMF indicated that previously, the likelihood of the global economy exceeding expectations was as great as the possibility of it stumbling forward. After the COVID-19 pandemic, this is a remarkable shift.
In the latest report, the IMF has revised the global growth forecast for 2024 to 3.1%, which is 0.2 percentage points higher than the 2.9% it projected in October last year. The report cites the main reason for the upward revision as the stronger-than-expected resilience shown by the United States and some large emerging markets and developing economies. The growth forecast for 2025 remains unchanged at 3.2%.
In 2023, there were some unexpected phenomena in the global economy, the most significant of which was that the U.S. economy did not experience a recession at all. The U.S. economy grew by 3.1% last year. A resilient labor market supported strong consumer spending, and the contribution of consumers eliminated recession fears; at the same time, the Federal Reserve's fastest interest rate hikes in 40 years did not exert excessive financial pressure on any larger developing countries.
Data shows that in January 2024, U.S. consumer confidence rose to its highest level since the end of 2021. Americans are more optimistic about the economy and the job market and have a more optimistic view of inflation. Jeffrey Young, former Global Head of Foreign Exchange at Citigroup and Co-Founder and CEO of DeepMacro, pointed out to Caijing reporters that in 2023, weakness or fear of weakness has been concentrated in three main industries: technology, finance (since the collapse of some regional banks in March 2023), and construction. It is worth noting that these industries are neither prominent nor have they led to sharp and concentrated losses in other industries. The job market and the overall economy have been slowing down broadly but steadily.
The growth rate of the U.S. core PCE price index has significantly slowed down in the past six months, with an annualized rate of 2%. Based on this trend, the forecast for the year-on-year inflation growth rate in the first quarter of 2024 is about 2.4%, and the unemployment rate is roughly 3.9%. However, most Wall Street insiders told Caijing reporters that while U.S. economic growth may slow down in 2024, the continued resilience of consumers, progress in deflation, and a moderate rebound in the housing market should help the economy grow at a relatively high rate.
The IMF believes that the U.S. economy will continue to slow down from 2.5% in 2023, to 2.1% in 2024, and to 1.7% in 2025, previously it was 1.5% and 1.8%. The report explains that the gradual tightening of U.S. monetary and fiscal policies, as well as the lagged effects of a softening labor market, will slow down overall demand.China's economic growth rate this year is expected to slow down from last year's 5.2% to 4.6%. For the Eurozone, the IMF believes that its economic growth will accelerate, with forecasted values of 0.9% for 2024 and 1.7% for 2025, but these are slightly lower compared to the report from October last year. European Central Bank monetary policy experts recently pointed out that the intensification of geopolitical tensions has affected business activities and consumer confidence in the Eurozone, adding further uncertainty.
Although the IMF's global growth forecast for 2024 has been revised upwards to 3.1% and 3.2%, it is still below the average of 3.8% between 2000 and 2019. This is due to factors such as interest rate hikes by central banks in many countries to combat inflation, the withdrawal of fiscal support in a high-debt environment, and slow potential productivity growth, all of which are dragging on economic activity.
In terms of inflation, the IMF believes that the decline in inflation in most regions is faster than expected due to the alleviation of supply-side issues and the impact of contractionary monetary policies. The organization estimates that the global overall inflation rate will slow down from 6.8% in 2023 to 5.8% in 2024, and further to 4.4% in 2025, compared to the 4.6% forecast in the October report last year.
The IMF considers that, with the slowdown in inflation and stable growth, the likelihood of a hard landing has decreased, and the risks to global growth are broadly balanced.
On the upside, a faster decline in inflation could lead to further easing of financial conditions, and if fiscal policy is more accommodative, there could be a temporary faster growth in the economy. The IMF points out that the challenge for central banks is to achieve the normalization of monetary policy and a smooth landing for the economy, "neither lowering interest rates too early nor delaying too much."
On the other hand, if geopolitical shocks, including the Red Sea crisis, lead to further surges in commodity prices, a tighter monetary environment may persist for a longer period, and economic growth may be weaker than expected. In addition, the IMF has observed a significant increase in the number of trade restrictive measures over the past two years, and this intensification of trade distortions and geoeconomic fragmentation may continue to drag down global trade levels.
Comments