IMF: Outlook for world economy is brighter, though still modest by historical standards

WASHINGTON — The International Monetary Fund upgraded its outlook for the global economy this year, saying the world appears to be heading for a “soft landing” – curbing inflation without much economic pain and producing steady, if modest, growth.

The IMF now projects global growth of 3.2% this year, up from the 3.1% it forecast in January and in line with the 2023 pace. And it forecasts a third year in a row in 2025 with a growth of 3.2%.

In its latest outlook, the IMF, a credit agency with 190 countries, notes that global expansion is being driven by unexpectedly strong growth in the United States, the world’s largest economy. The IMF expects the U.S. economy to grow 2.7% this year, up from the 2.1% it forecast in January and faster than solid 2.5% growth in 2023.

While sharp price increases remain an obstacle globally, the IMF expects global inflation to fall from 6.8% last year to 5.9% in 2024 and 4.5% next year. In the world’s advanced economies alone, the organization expects inflation to fall from 4.6% in 2023 to 2.6% this year and 2% in 2025, due to the effects of higher interest rates.

The Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of England have all raised interest rates sharply with the aim of slowing inflation to around 2%. In the United States, annual inflation has plummeted from a peak of 9.1% in the summer of 2022 to 3.5%. Still, US inflation remains stubbornly above the Fed’s target level, meaning any interest rate cuts by the US central bank are likely to be postponed.

Higher interest rates were widely expected to cause severe economic pain – even a recession – worldwide, including in the United States. But it didn’t happen. Growth and employment have held up, even as inflation has declined.

“Despite many gloomy forecasts, the global economy has remained stable and inflation is returning to its target,” Pierre-Olivier Gourinchas, the IMF’s chief economist, told reporters ahead of the release of the fund’s latest World Economic Outlook.

Although the global economy is showing unexpected resilience, it is not particularly strong. From 2000 to 2019, global economic growth averaged 3.8% – much higher than IMF forecasts of 3.2% for this year and next. Persistently high interest rates are keeping global growth prospects in check, along with sluggish productivity gains in much of the world and the withdrawal of government economic support rolled out during the pandemic.

The IMF warns that economic expansion could be thwarted by the continued negative effects of higher interest rates and by geopolitical tensions, including the war in Gaza, which risk disrupting trade and raising energy and other prices.

China, the world’s second-largest economy, is struggling with the collapse of its real estate market, negative consumer and business confidence and rising trade tensions with other major countries. The IMF expects China’s economy, which once regularly generated double-digit annual growth, to slow from 5.2% in 2023 to 4.6% in 2024 and 4.1% next year.

But on Tuesday, Beijing reported that China’s economy grew faster than expected in the first three months of the year, fueled by policies aimed at boosting growth and stronger demand. China’s economy grew at an annual rate of 5.3% in January-March, surpassing analyst expectations of around 4.8%, official data showed. Compared to the previous quarter, the economy grew by 1.6%.

Japan’s economy, the world’s fourth largest, which lost third place to Germany last year, is expected to slow to 0.9% in 2024 from 1.9% last year.

Of the 20 countries using the euro, the IMF expects growth of just 0.8% this year – weak but double the eurozone’s expansion in 2023. The UK is expected to make slow economic progress, with the growth will increase from 0.1% last year to 0.5% in 2024 and 1.5% next year.

Among developing countries, India is expected to continue to outgrow China, although growth in the world’s fifth-largest economy will slow, from 7.8% last year to 6.8% this year and 6.5% in 2025.

The IMF predicts a steady but slow acceleration of growth in sub-Saharan Africa – from 3.4% last year to 3.8% in 2024 to 4.1% next year.

In Latin America, the economies of Brazil and Mexico are expected to slow until 2025. Brazil will likely be hampered by high interest rates and Mexico by government budget cuts.