The International Monetary Fund (IMF) said on Tuesday that the global economy is on track to record modest growth in the next two years amid a slowdown in activity in the United States, growth reaching the lowest level in Europe, and an increase in consumption and exports in China, but the risks threatening the path are many.
In an update to its global economic forecasts, the Fund warned of slowing momentum in efforts to combat inflation, which may postpone interest cuts and keep the pressure of the dollar’s strength on developing economies.
The Fund kept its forecast for real global GDP growth in 2024 unchanged from April at 3.2% and increased its forecast for 2025 by 0.1% point to 3.3%. Expectations are not enough for growth to rise from the weak levels that Kristalina Georgieva, the fund’s manager, warned could lead to something resembling the “cold twenties.”
However, some changes appear in the updated forecasts among major economies. Growth expectations in the United States for 2024 were reduced by 0.1% to 2.6%, to reflect slower than expected consumption in the first quarter. The Fund's forecast for growth in the United States for 2025 remained unchanged at 1.9%, a slowdown caused by declining labor market strength and reduced spending in response to tight monetary policy.
“Growth in major advanced economies has become more consistent in light of shrinking output gaps,” IMF Chief Economist Pierre-Olivier Gorinchas said in a blog post accompanying the report, adding that signs of a slowdown are increasing in the United States, while Europe is heading toward a recovery.
The International Monetary Fund significantly increased its forecast for China's economic growth to 5.0%, in line with the Chinese government's target for this year, up from 4.6% in April, due to a recovery in personal consumption in the first quarter and strong exports. The International Monetary Fund also increased its forecast for Chinese economic growth in 2025 to 4.5%, up from 4.1% in April.
But Chinese momentum may falter after Beijing announced yesterday, Monday, that GDP growth in the second quarter was only 4.7%, which is much lower than expectations, amid weak consumer spending amid a long-term decline in the real estate sector.
Gorinchas told Reuters in an interview that the new data represents downside risks to the fund's forecasts because it indicates weak consumer confidence and continuing problems in the real estate sector to boost domestic consumption, China must work on a comprehensive solution to the real estate crisis because it represents the main assets for most Chinese families.
"When you look at China, the weaker domestic demand, the more growth depends on the external sector," he added, and this stimulates further trade tensions.
On a more positive note, the Fund slightly increased its 2024 eurozone growth forecast by 0.1 percentage point to 0.9%, and left its 2025 forecast unchanged at 1.5%.
The IMF said the euro zone had “hit bottom” and saw stronger growth in services in the first half of the year, while higher real wages would help energy consumption next year, and easing monetary policy would support investment.
The Fund cut Japan's growth forecast for 2024 to 0.7% from 0.9% in April, partly due to supply disruptions due to the closure of a large auto plant and weak private sector investment in the first quarter.
The Fund warned of the risks of escalating inflation in the near term as service prices continue to rise amid wage growth in the labor-intensive sector, and said that renewed trade and geopolitical tensions may lead to stoking price pressures as a result of the increased cost of imported goods along the supply chain.
“The risk of high inflation enhances the prospects of higher interest rates for a longer period, which in turn leads to increased external, financial and financing risks,” the IMF said in the report.
Gorinchas said that although consumer prices in the United States fell last month, the Federal Reserve could afford to wait a little longer before starting to cut interest rates to avoid any inflationary surprises.
The Fund also warned of potential fluctuations in economic policy as a result of many elections this year, which could negatively affect the rest of the world.
“These potential shifts entail risks of financial waste that will exacerbate debt dynamics, negatively affecting long-term returns and supporting a protectionist trend,” the Fund said.
The Fund did not mention US Republican Party candidate Donald Trump, who proposed imposing 10% tariffs on all US imports, nor did it mention Democratic President Joe Biden, who sharply increased customs duties on electric cars, batteries, solar panels, and semiconductors imported from China.
But the Fund said that increasing tariffs and expanding the scope of domestic industry policy could lead to “harmful cross-border repercussions, as well as sparking retaliations that lead to a costly race to the bottom.”
Instead, the IMF recommended that policymakers seek to restore price stability, gradually ease monetary policy, replenish financial reserves depleted by the pandemic, and pursue policies that promote trade and increase productivity.