Global economy resilient but taming inflation must be priority, IMF says

IMF economic counsellor Pierre-Olivier Gourinchas said the global economy is displaying resilience and growth, but stressed that challenges lie ahead. AFP

With monetary-policy tightening probably at its peak among advanced economies, the International Monetary Foundation said taming inflation must remain a priority after the global economy avoided a recession last year.

“The global economy continues to display remarkable resilience and growth holding steady and inflation declining, but many challenges sill lie ahead,” IMF economic counsellor Pierre-Olivier Gourinchas said on Tuesday.

After a “surprisingly resilient” 2023, the IMF revised global growth slightly higher this year to 3.2 per cent.

This is still low by historical standards, though, which the IMF attributes to higher borrowing costs, lingering effects of the Covid-19 pandemic and the war in Ukraine, as well as global fragmentation.

The IMF noted the economy remained resilient despite rising interest rates, which central banks aggressively lifted after a surge in inflation in 2022.

And while global headline inflation is forecast to fall to 5.9 per cent this year after 2023’s 6.8 per cent average, the IMF said it is too soon to declare victory.

As a soft landing is within sight for the global economy, the multilateral lender said countries should prioritise ensuring a smooth reduction in inflation.

“Inflation trends are encouraging, but we are not there yet,” Mr Gourinchas said, noting recent inflationary data in some advanced economies.

Recent economic data in the US shows the nation’s fight in taming inflation could be stalled, which could lead the Federal Reserve, and by extension GCC countries, to hold off on retreating from their restrictive policies until later in the year.

Mr Gournichas said the IMF still projects the Fed to begin dialling back some time this year, but recent bumpy data might delay it.

The European Central Bank and Bank of England are also expected to withdraw from their restrictive policy this year, possibly as soon as June.

The IMF expects the Fed to cut rates down from 5.4 per cent to 4.6 per cent this year, in line with the Fed’s March projections.

Meanwhile, it expects the Bank of England to reduce rates from 5.3 per cent to 4.8 per cent and the ECB from 4.0 per cent to 3.3 per cent by the end of this year.

The fund urged central banks to be careful in their near-term decisions, as holding rates for too long or reducing them too soon both carry risks.

“At the same time, as central banks take a less restrictive stance, a renewed focus on implementing medium-term fiscal consolidation to rebuild room for budgetary manoeuvre and priority investments, and to ensure debt sustainability, is in order,” the report said.

Advanced economies’ monetary tightening policies may have also contributed to lowering energy prices, the IMF said.

The price of energy also fell faster than expected because of non-Opec oil production and liquefied natural gas output, particularly in the US, which has become the world’s largest oil and gas producer.

Resilient economy masks global divide

While the global economy showed a resilient 2023, the IMF said those gains were not felt equally, with low-income countries still experiencing the effects of the Covid-19 pandemic.

The US growth trend has passed pre-pandemic levels.

“We now estimate that there will be more scarring for low-income developing countries, many of which are still struggling to turn the page from the pandemic and cost-of-living crises,” the IMF said.

The IMF expects growth in the EU to rebound, “but from very low levels”, as economic activity is weighed down by previous shocks and the ECB’s tight monetary policy.

Services inflation and high wage growth could delay the euro area’s inflation fight, but the IMF does not see much evidence of overheating.

“With depressed domestic demand, external surpluses could well rise,” the IMF said.

“The risk is that this will further exacerbate trade tensions in an already fraught geopolitical environment.”

The IMF upwardly revised its projection for US economic growth to 2.7 per cent this year.

The euro area’s gross domestic product is projected to grow at 0.8 per cent in 2024 compared to 0.4 per cent last year, while the UK economy is expected to grow by 0.5 per cent.

The Middle East and Central Asia’s economy is forecast to grow 2.8 per cent this year, a slight downwards revision from the IMF’s January expectation.

Saudi Arabia’s GDP is projected to increase 2.6 per cent, also a slight downwards revision.

The IMF called on countries to rebuild their fiscal buffers to help protect their sovereign debt levels and reverse the decline in medium-term growth prospects.

The lender also called for the independence of central banks, whose moves will be scrutinised during a year that will witness a historic number of elections.