The International Monetary Fund (IMF) in its latest April 2024 World Economic Outlook (WEO) report anticipates that the global economy will continue to grow at the same pace (3.2%) as in 2023 during the 2024-2025 period, with overall global inflation and core inflation steadily declining.

In the latest outlook, the IMF mentioned "divergence" in both the global economic growth expectations and global inflation expectations.

The IMF's forecast for the global economic growth rate in 2024 has been raised by 0.1 percentage points compared to the January 2024 WEO and by 0.3 percentage points compared to the October 2023 WEO. Adjustments were made to the growth rates of some major economies, such as further increasing the forecast for the United States, while moderately lowering the forecasts for several other major economies. The IMF's expectations for the global inflation outlook are roughly similar to the October 2023 WEO, with the downward adjustment in inflation expectations for advanced economies being offset by the upward adjustment in expectations for emerging markets and developing economies.

Advertisement

This baseline forecast is based on a series of projections for global commodity prices, monetary policy, and fiscal policy. Regarding commodity prices, the IMF expects the average price of fuel commodities to fall by 9.7% in 2024, with oil prices falling by about 2.5%.

In terms of monetary policy, the IMF stated that as inflation is expected to continue to decline towards the target and long-term inflation expectations remain unchanged, central banks in major advanced economies are expected to start lowering interest rates in the second half of 2024.

On fiscal policy, the IMF anticipates that governments in advanced economies will tighten fiscal policy in 2024 and slow the pace of tightening in 2025-2026. It is expected that the fiscal stance of emerging markets and developing economies will be roughly neutral in 2024 and will tighten in 2025.

The IMF's latest forecast for global medium-term economic growth (2029) is 3.1%, still at the lowest level in decades, below the pre-pandemic level (January 2020 WEO) of 3.6%, the pre-global financial crisis level (April 2008 WEO) of 4.9%, and also below the historical (2000-2009) average real economic growth rate of 3.8%.

"We are most concerned about geopolitical shocks, including the Gaza Strip and the Russia-Ukraine conflict, which could shake commodity prices and thus deal a severe blow to low-income countries," said Daniel Leigh, Chief of the World Economics Department at the IMF, in an exclusive interview with First Financial Daily. Persistent inflation is also one of the risks. Recent economic data from the United States have been higher than expected, and if this means that interest rates will remain high for a longer period, it will once again affect economic growth and have a negative impact on the borrowing costs of emerging markets.

"Of course, economic growth could also exceed expectations. Given that 2024 is a major election year, if governments increase spending after the elections to fulfill their campaign promises, it will be beneficial to the short-term growth prospects. Indeed, given the continuous rise in global debt, these short-term stimuli could also bring problems," Leigh added, "Overall, compared to six months ago, our risk assessment is more balanced."

In terms of inflation, the IMF mentioned this time that since the surge in global inflation, the overall inflation rate approached the pre-pandemic (2017-2019) level for the first time at the end of 2023. Nevertheless, the IMF emphasized that inflation in most economies has not yet reached the target.Economic Growth Resilient but Divergent

The IMF forecasts that the overall growth rate of advanced economies will rise from 1.6% in 2023 to 1.7% in 2024 and 1.8% in 2025. Compared to the WEO in January 2024, the forecast for 2024 has been revised up by 0.2 percentage points, while the prediction for 2025 remains unchanged. The IMF states that the upward revision for 2024 reflects adjustments to the growth forecast for the United States, and the unchanged forecast for 2025 is due to the upward revision in the expected economic growth rate of the U.S. largely offsetting the downward revision for the eurozone.

Specifically, the IMF has significantly raised its forecast for the U.S. economic growth rate in 2024 by 0.6 percentage points from the January WEO to 2.7%. The IMF explains that this largely reflects the statistical carryover effect from stronger-than-expected growth in the United States in the fourth quarter of 2023. At the same time, some robust economic momentum is expected to continue into 2024. However, due to gradual fiscal tightening and a slowdown in labor market strength, which will reduce overall demand, the growth rate will decelerate to 1.9% in 2025.

The IMF expects the growth rate of the eurozone to recover from 0.4% in 2023 to 0.8% in 2024 and 1.5% in 2025. The low growth rate in the eurozone in 2023 was mainly due to the relatively high economic risks brought by the Ukraine crisis. As the impact of energy price shocks fades and inflation in Europe declines, supporting the growth of real incomes, stronger household consumption is expected to drive the economic recovery in Europe.

Among other advanced economies, as the lagged negative effects of high energy prices diminish, the UK's growth is expected to rise from 0.1% in 2023 to 0.5% in 2024, and then to 1.5% in 2025. Disinflation has eased financial conditions in the UK, allowing for a recovery in real household incomes. In Japan, due to the fading of one-time factors that supported growth in 2023, including a surge in inbound tourism, the IMF forecasts that Japan's economic growth rate will slow from 1.9% in 2023 to 0.9% in 2024 and 1% in 2025.

The IMF expects the overall growth rate of emerging and developing economies to stabilize at 4.2% in 2024 and 2025, with the slowdown in growth of emerging and developing Asian economies offset by growth in the Middle East and Central Asia, as well as sub-Saharan African economies. As some constraints on recent growth ease, the IMF forecasts that low-income developing countries will gradually achieve growth, increasing from 4.0% in 2023 to 4.7% in 2024 and 5.2% in 2025. However, the growth rate of emerging and developing economies in Asia is expected to decline from 5.6% in 2023 to 5.2% in 2024 and 4.9% in 2025.

The growth rate is also expected to decline for emerging and developing economies in Europe. This group had a growth rate of 3.2% in 2023, and the IMF forecasts that its growth rate will slow to 3.1% and 2.8% in the next two years. However, this expectation is still 0.5 percentage points and 0.3 percentage points higher than the January WEO, respectively. In addition, the IMF states that the slowdown in European emerging economies reflects that, as the benefits of high investment and strong private consumption (supported by wage growth in a tight labor market) fade, Russia's growth rate is expected to decline from 3.2% in 2024 to 1.8% in 2025.

The IMF forecasts that the growth rate of emerging and developing economies in the Middle East and Central Asia will rise from 2.0% in 2023 to 2.8% in 2024 and 4.2% in 2025, but the growth rate forecast for 2024 has been slightly revised down by 0.1 percentage points from the January WEO. This mainly reflects the IMF's downward revision of its growth forecast for Iran in 2024, in anticipation of a decline in oil revenue.

Impact of Artificial Intelligence

The IMF emphasizes that since October 2023, global economic risk factors have eased, resulting in a balance between the upside and downside risks surrounding the baseline forecast. In contrast, during the WEO in April and October 2023, the global economy's downside risks were more pronounced.In the context of downside risks, the IMF mentioned the risk of regional conflicts leading to a new surge in commodity prices. The IMF analysis suggests that the Israeli-Palestinian conflict could potentially escalate further into a broader regional conflict. Persistent attacks in the Red Sea and the ongoing crisis between Russia and Ukraine could generate additional supply shocks detrimental to the global recovery, causing a spike in the costs of food, energy, and transportation. Further geopolitical tensions—including an escalation of the Ukrainian crisis—might also restrict the cross-border movement of food, fuel, and fertilizers, leading to additional price volatility and undermining business and consumer sentiment. Although the escalation of the Ukrainian crisis mentioned by the IMF has not yet materialized, last weekend saw heightened tensions in the Middle East, with the market's greatest concern being Iran's involvement in the conflict.

The IMF believes that such geopolitical shocks could complicate the ongoing disinflation process and delay the easing of policies by global central banks, having a negative impact on global economic growth. This adverse supply shock could have asymmetric effects on various countries, particularly severe for low-income countries where food and energy constitute a large share of household expenditures.

On the upside, the IMF mentioned the potential of artificial intelligence (AI) to enhance productivity. The IMF stated that recent advancements in AI, especially the emergence of large language models (LLMs) and generative AI transformations, signify a leap in technology surpassing human capabilities in several cognitive domains. In the short term, the advancement of AI development might, in some cases, promote investment as businesses allocate more resources to integrate innovative tools and improve production processes. In the medium term, AI could increase worker productivity and income, fostering economic growth, but also leading to job displacement and inequality.

The IMF anticipates that advanced economies will benefit more rapidly from AI development than emerging and developing economies, as the former has a more cognitive-intensive employment structure. Specifically, AI will affect 60% of workers in advanced economies, with about half achieving higher productivity and income. AI will also impact job positions in 40% of emerging economies and 26% of low-income economies, meaning that the impact of AI on the labor markets of these two types of economies in the near term is smaller, and the room for improvement in worker productivity is also more limited.

Global inflation is expected to decline at differentiated paces.

In the last quarter of 2023, the overall inflation rates for advanced economies and emerging market economies were 2.3% and 9.9%, respectively, both lower than the peak of 9.5% in the second quarter of 2022 and the 13.7% peak in the first quarter of 2022. As global overall inflation approaches pre-pandemic levels for the first time after a previous surge, the IMF expects the global overall inflation rate to further decrease from an average of 6.8% in 2023 to 5.9% in 2024 and 4.5% in 2025.

The IMF anticipates that inflation rates in advanced economies will decline before those in emerging and developing economies, with a further 2 percentage point decrease in 2024 and a quicker return to near pre-pandemic average levels, with an average inflation rate of 2.0% in 2025. Approximately one year later, emerging and developing economies are also expected to return to near the pre-pandemic average level of around 5.0%.

Not only do advanced and emerging market economies differ, but there is also a significant divergence in the pace of inflation decline across various sub-regions, ranging from 2.4% in Asian emerging and developing economies to 18.8% in European emerging and developing markets.

Regarding U.S. inflation, the IMF told reporters that since climbing to 9% in June 2022, U.S. inflation has been steadily declining. The current issue is that inflation has remained stable above 3% over the past six months, due to a very strong macroeconomy (for example, in the job market, there are 1.4 job vacancies for every unemployed person, far higher than pre-pandemic levels). The IMF predicts that U.S. inflation will return to the Federal Reserve's target by 2025.

The expected decline in global inflation in 2024 is mainly due to a broader decrease in global core inflation. The IMF expects the global core inflation rate to drop by 1.2 percentage points in 2024, compared to only a 0.2 percentage point decrease in 2023. Among them, the pace of core inflation decline in advanced economies is also faster than in emerging economies. The drivers of core inflation decline vary by country, but the fundamentals mainly include the impact of still-tight monetary policy, relative weakness in the labor market, and the pass-through effects of earlier price declines (especially in energy prices).