Most of the world has been able to lower inflation and plan for an economic soft landing, avoiding a recession, but faces geopolitical risks and weaker long-term growth prospects, according to the International Monetary Fund.
Global headline inflation will decline to 3.5% annually by the end of 2025, from an average of 5.8% in 2024, the agency said in its World Economic Outlook released Tuesday. Inflation peaked at a year-over-year rate of 9.4% in the third quarter of 2022. The final rate of 2025 was slightly below the average annual price increase in the two decades before the Covid-19 pandemic.
“The global war against inflation is almost won,” the IMF report trumpeted, despite what it called a “triple policy pivot” to address interest rates, government spending, and reforms and investments to boost productivity.
“Despite the good news on inflation, downside risks have increased and now dominate the outlook,” IMF chief economist Pierre-Olivier Gourinchas said. Now that inflation is headed in the right direction, global policymakers face new challenges due to the world’s economic growth rate, the IMF warned.
The fund maintained its global growth estimate at 3.2% for 2024 and 2025 – which it called “stable but not exciting.” The United States is now forecast to grow faster, and strong expansion is also taking place in emerging Asian economies due to strong artificial intelligence-related investments. But the IMF downgraded the outlook for other advanced economies – particularly the largest European countries – as well as some emerging markets, blaming escalating global conflicts and raising risks to commodity prices.
Caution is needed in the end of disinflation
The Washington-based IMF, with 190 member countries, said in a summary that responsive monetary policy is key to lowering inflation when normal labor market conditions and supply shocks are not addressed, all of which help prevent a global recession.
Central banks should remain vigilant by reducing inflation, the report warned. He added that services inflation is still nearly double pre-pandemic levels as wages in certain countries continue to rise to the cost of living, leading some emerging market economies such as Brazil and Mexico to see an increase in inflationary pressures.
“While inflation expectations remain favorable at this time, they may be more difficult in the future, as workers and companies will be more vigilant to protect their living standards and profits going forward,” the report said.
Low-income countries, where food and energy costs contribute more to household costs, are also more sensitive to commodity price spikes that can lead to higher inflation. Poor countries are already under greater stress due to debt repayments, which can limit funds for public programs.
market volatility among the main downside risks
Higher financial volatility is another threat to global growth, the IMF report said. A sudden market sell-off, such as the one that occurred in early August, was cited by the IMF as the main risk affecting the economic outlook. Although the market has stabilized since the brief August slump, supported by the unwinding of trade and weaker-than-expected US labor market data, concerns remain, according to the fund.
“The return of financial market volatility over the summer has fueled old fears about hidden vulnerabilities. This has increased anxiety about the appropriate stance of monetary policy,” the report said.
Another challenge for global financial markets may come at the end of the fight against inflation. Market turbulence and contagion are key risks if underlying inflation remains stubborn – an important risk for low-income countries already under stress from high sovereign debt and currency market volatility.
Other downside risks include geopolitical concerns, particularly Middle East conflicts and potential commodity price spikes. Deeper contraction of the Chinese property market, interest rates remaining too high for too long and rising protectionism in global trade are other threats to prosperity, the IMF said.
The long-term outlook is longer. The IMF predicts global growth will rise to 3.1% annually by the end of 2020, the lowest rate in decades. While China’s weaker outlook has weighed on medium-term projections, so have the deteriorating prospects in Latin America and Europe. Structural problems such as low productivity and an aging population also limit growth prospects.
“Slowdowns projected in the largest emerging markets and developing economies show the way again to close the income gap between poor and rich countries. Having growth stuck in low equipment can also exacerbate income inequality in the economy,” the IMF warned.
