The International Monetary Fund (IMF) has revised its global inflation forecast for next year, urging central banks to maintain tight monetary policies until there is a sustained easing of price pressures. In its latest World Economic Outlook, the IMF increased its projection for consumer price increases in 2024 to 5.8%, up from the 5.2% forecasted three months ago. The IMF expects inflation to remain above central bank targets in most countries until 2025.
The release of the IMF's forecasts comes amid the annual IMF-World Bank meetings, which are being held in Marrakech, Morocco. This marks the first time in 50 years that the meetings have taken place in Africa. However, the global economy is beset by uncertainties, including a deadly attack on Israel by Hamas over the weekend, which has reignited fears of a wider conflict in the oil-rich Middle East.
To combat high inflation, major central banks, including those in the US and the European Union, have raised interest rates aggressively over the past year. Global inflation reached 8.7% in 2022, the highest level since the mid-1990s. Pierre-Olivier Gourinchas, the IMF's chief economist, emphasized the need for tight monetary policy until inflation shows sustained decline towards targets, stating, "We're not quite there."
The surge in inflation can be attributed to various factors, such as disruptions in global supply chains caused by the COVID-19 pandemic, fiscal stimulus measures in response to lockdowns, strong demand resulting from economic reopenings, tight labor markets in the US, and disruptions in food and energy supplies due to Russia's invasion of Ukraine.
In terms of economic growth, the IMF now projects global growth of 2.9% for next year, a slight decrease from its previous outlook in July. This falls below the 3.8% average seen in the two decades before the pandemic. The forecast for 2023 remains unchanged at 3%. The IMF has been warning about weakened medium-term prospects since April, pointing to factors such as the long-term consequences of the pandemic, the crisis in Ukraine, the fragmentation of the global economy, and central bank policy tightening.
Gourinchas described the global economy as "limping along" and not yet sprinting towards robust recovery. However, the IMF believes there are better chances now that central banks can tame inflation without pushing the world into a recession.
The IMF's aggregate growth projection masks important changes in individual country forecasts. The US, the world's largest economy, has seen an upward revision in its growth outlook, with projections for this year raised to 2.1% from 1.8%. The IMF expects stronger business investment and resilient consumption growth to drive growth in the US. Additionally, the US unemployment rate is projected to peak at 4% in the last quarter of 2024, lower than the 5.2% predicted earlier.
On the other hand, China's growth forecast has been downgraded due to declines in real estate investment, housing prices, and weak consumer sentiment. The IMF now expects China's economy to grow at 5% in 2023 and at 4.2% in 2024, slightly lower than previous estimates.
Similarly, the growth projection for the Eurozone has been revised downwards, with estimates of 0.7% in 2023 and 1.2% in 2024. Germany is expected to contract more than expected, while France's forecast has been upgraded due to improved industrial production and external demand in the first half of 2023.
Japan's growth forecast for this year has been raised to 2% from 1.4%, driven by pent-up demand, increased tourism, accommodative policies, and a rebound in automotive exports. Meanwhile, the UK's growth outlook for 2024 has been reduced to 0.6% from 1%, reflecting tighter monetary policies to curb inflation and the lingering impact of high energy prices.
The IMF has consistently warned about fragmentation in the global economy, fueled by geopolitical tensions between the US and China, as well as Russia's aggression. The fund expects trade growth to reach 0.9% this year, down from the 2% projected in July and significantly lower than the 4.9% average seen in the two decades prior to the pandemic. Factors contributing to this decline include a shift towards domestic services, the delayed effects of dollar appreciation, and increasing trade barriers.