Yesterday, the International Monetary Fund (IMF) updated its 2024 Global Economic Prospects report. Below is the full report.
As the global economy recovers from the COVID pandemic, Russia's invasion of Ukraine, and the cost-of-living crisis. The global economy has proven to be surprisingly resilient. Inflation has fallen faster than expected from its peak in 2022 and had a smaller than expected impact on employment and economic activity, reflecting good supply-side developments and central bank tightening stabilizing inflation expectations. At the same time, high interest rates aimed at fighting inflation and the withdrawal of fiscal support against the backdrop of high debt are expected to put pressure on economic growth in 2024.
Major economies are growing strongly. Economic growth in the United States, as well as several major emerging market and developing economies, is expected to be stronger than expected. In some cases,** and private spending have boosted economic growth, with growth in real disposable incomes supporting consumption as labor markets remain tight and households tap into savings accumulated during the pandemic. Supply-side expansion has also been consolidated, labor force participation has generally increased, pandemic-era **chain issues have been resolved, and delivery times have been shortened. Of course, not all regions have seen growth momentum, with growth in the eurozone being particularly weak, reflecting weak consumer confidence, the lingering effects of high energy**, and weakness in rate-sensitive manufacturing and business investment. Amid rising borrowing costs, low-income economies continue to experience significant output losses compared to pre-pandemic levels.
Inflation is falling faster than expected. Inflation has fallen faster than expected amid a favourable global** situation, with recent monthly headline and underlying inflation readings both close to pre-pandemic averages. On a quarterly-adjusted quarter-on-quarter basis, global headline inflation in the fourth quarter of 2023 is expected to be about 0.0 percent below the October 2023 WEO**3 percentage points. The weakening of inflation reflects a weakening of the relative shock and its associated transmission to core inflation. The decline also reflects an easing of tight labor market conditions, fewer job vacancies, a slight increase in the unemployment rate, and an increase in the labor force**, in some cases linked to a large inflow of immigrants. Wage growth remained largely contained and the wage spiral did not continue. Near-term inflation expectations have declined in major economies, but long-term expectations remain stable.
High borrowing costs lead to lower demand. In an effort to bring inflation down, the world's major central banks raised policy rates to restrictive levels in 2023, leading to high mortgage costs, challenging corporate debt refinancing, tighter credit**, and weaker commercial and residential investment. Commercial real estate is particularly under pressure, with rising borrowing costs exacerbating post-pandemic structural changes. But as inflation eases, market expectations of a future decline in policy rates have led to lower long-term interest rates and ** Still, long-term borrowing costs remain high in advanced, emerging market and developing economies, in part because debt has been rising. In addition, central banks' policy rate decisions are becoming increasingly out of sync. Interest rates have been falling since the second half of 2023 in some countries where inflation has fallen, including Brazil and Chile, where central banks have tightened policy earlier than others. In China, where inflation has been close to zero, the central bank has recently eased monetary policy. The Bank of Japan has kept short-term interest rates close to zero.
Fiscal policy magnifies economic disparities. Advanced economies** eased fiscal policy in 2023. The U.S. has surpassed pre-pandemic levels in terms of GDP, and its policy easing has outpaced that of the eurozone and other economies that are not fully recovering. In emerging market and developing economies, average output is further below pre-pandemic trends, with an average fiscal stance of neutral estimates. The exceptions are Brazil and Russia, where fiscal policy was eased in 2023. In low-income countries, tight liquidity and rising interest payment costs have crowded out necessary funds. In 2024, fiscal policy stance is expected to tighten in some advanced, emerging, and developing economies to rebuild budget maneuver space and curb the upward debt path, a shift that is expected to slow growth in the near term.
Future**: Growth is resilient but slow
The global economy is expected to grow at a rate of 31% and is expected to remain at 3 in 20241% and then rises slightly to 3 in 20252%。Compared to the October 2023 World Economic Outlook, the 2024** upward revision is about 02 percentage points, mainly for China, the United States, and large emerging market and developing economies. Still, the outlook for global economic growth in 2024 and 2025 remains below 3A historical average of 8%, reflecting the withdrawal of restrictive monetary policy and fiscal support, as well as lower potential productivity growth. Growth in advanced economies is expected to decline slightly in 2024 before showing growth in 2025, with the eurozone recovering from low growth in 2023 and a slowdown in the United States. Emerging market and developing economies are expected to achieve stable growth in 2024 and 2025, but there are regional differences.
The world** growth rate is expected to be 33% and 3 in 20256%, down from 4Historical average growth rate of 9%. Heightened distortions and geoeconomics are expected to continue to affect global levels. Global alert data shows that countries implemented about 3,200 new restrictions in 2022 and 3,000 in 2023, up from about 1,100 in 2019.
These are based on the assumption that fuel and non-fuel commodities will fall in 2024 and 2025, and that interest rates in major economies will fall. The average annual oil price is expected to fall by about 23%, while non-fuel commodities** are expected to decline by 09%。IMF staff, the Fed, ECB and Bank of England policy rates will remain at current levels until the second half of 2024, and then gradually decline as inflation approaches target. The Bank of Japan is expected to maintain an overall accommodative stance.
For advanced economies, growth is expected to grow from 16% is down slightly to 1. in 20245% and then rise to 1 in 20258%。01 percentage point, reflecting stronger-than-expected growth in the United States, partially offset by weaker economic growth, with eurozone growth beating expectations.
In the U.S., U.S. economic growth is expected to grow from 2.2 percent in 2023 due to a slowdown in aggregate demand due to the lagged effects of monetary policy tightening, gradual fiscal tightening, and a weaker labor market5% to 21% and 1. in 20257%。For 2024, it has been revised upwards by 06 percentage points, mainly reflecting the statistical carry-over effect of stronger-than-expected growth in 2023.
Growth in the eurozone is expected to grow from an estimated 0The low growth rate of 5% will return to 09% and 1. in 20257%。The fading energy** shock and lower inflation are expected to support real income growth and are expected to drive the economic recovery. However, growth in 2024 has been revised down by 03 percentage points, which is mainly due to a carryover from weaker-than-expected results in 2023.
In other advanced economies, economic growth in the UK is expected to rise slightly from 0.0 in 2023 as the lagged negative effects of high energy** wane5% is expected to grow to 06%, growing to 1. by 20256%。Financial conditions have eased and real incomes have recovered. Growth in 2025 has been revised down by 04 percentage points, reflecting less room to catch up due to recent statistical upward revisions to output levels during the pandemic.
Japan's economic growth is expected to increase from 1. in 20239% slowed to 09% and 0. in 2025At 8%, Japan's output is expected to remain above potential, reflecting the fading of one-off factors supporting economic activity in 2023, including the depreciation of the yen, the depreciation of the pent-up yen, etc. Rising demand, and a recovery in business investment after delays in project implementation.
In emerging market and developing economies, growth is expected to remain at 41%, which will rise to 42%。Compared to the October 2023 report, the growth rate in 2024 has been revised upwards by 01 percentage point, reflecting upward revisions in multiple regions.
Growth in emerging and developing economies in Asia is expected to grow from 5.5 in 20234% to 5 in 20242% and 4 in 20258%, of which the growth in 2024 is 04 percentage points, which is mainly due to the Chinese economy. China's economy is expected to grow by 4 in 2024 and 2025, respectively6% and 41%, up 0. from October 2023** to 20244 percentage points. The upward revision reflects stronger-than-expected growth in 2023 and** a carryover of increased spending on capacity building to respond to natural disasters. India's economic growth is expected to remain at 6A strong level of 5%, the growth rate of the two years has been revised up by 02 percentage points, reflecting the resilience of domestic demand.
Growth in Europe's emerging and developing economies is expected to grow from 27% to 2. in 20248% and then down to 2 in 20255%。The 2024 ** is 0. higher than the October 2023 **6 percentage points due to the recovery of the Russian economy. Russia is expected to grow by 26% with a growth rate of 1 in 20251%, with a growth rate of 1 in 2024 compared to the figure in October 20235 percentage points, reflecting the carry-over effect due to high military spending and stronger-than-expected growth in 2023. Private consumption is underpinned by wage growth in a tight labor market.
In Latin America and the Caribbean, the growth rate is expected to increase from 25% to 1. in 20249% and then rise to 2 in 20255%, and the growth rate in 2024 is expected to be revised down by 04 percentage points. The ** revision for 2024 reflects negative growth in Argentina against the backdrop of major policy adjustments to restore macroeconomic stability. Among the other major economies in the region, Brazil raised by 02 percentage points, Mexico raised by 06 percentage points, mainly due to the continuation effect of stronger-than-expected domestic demand and higher-than-expected growth in large** partner economies.
Growth in the Middle East and Central Asia is expected to grow from 20% rises to 2. in 20249% and 4. in 20252%。Compared to October 2023**, it will be lowered by 05 percentage points, an increase of 03 percent. This is mainly attributed to Saudi Arabia and reflects a temporary decline in oil production in 2024, including unilateral production cuts and production cuts in accordance with the agreement reached by OPEC.
In sub-Saharan Africa, economic growth is expected to rise from 3.2 in 2023 as the negative effects of earlier weather shocks subside and the problem gradually improves3% rises to 38% and 4 in 20251%。Compared to October 2023, the 2024 ** has been lowered by 0.2 percentage points, mainly reflecting the weaker situation in South Africa due to increasing restrictions on economic activities through logistics.
Inflation expectations: steadily declining
Global headline inflation is expected to grow from 68% (annual average) down to 58% and 4 in 20254%。Compared to October 2023, the global ** in 2024 is not revised, and in 2025 ** it is revised down by 02 percentage points. The pace of deflation in advanced economies is expected to accelerate, with inflation falling by 2 by 20240 percentage points to 26%, while inflation in emerging market and developing economies is expected to fall by only 03 percentage points to 81%。Advanced economies have both revised downwards in 2024 and 2025. In emerging market and developing economies, the 2024 upward revision is mainly due to the relative adjustment in Argentina and the removal of legacy** controls, past currency depreciation, and related ** transmission, which is expected to exacerbate inflation in the short term. The drivers of the decline in inflation vary from country to country, but generally reflect lower core inflation, which is due to the pass-through effects of the continued tightening of monetary policy, the corresponding weakness of the labor market, and the early and sustained decline in relative energy**.
Overall, about 80% of the world's economies are expected to experience a decline in average annual headline and core inflation by 2024. Among the economies that have set inflation targets, headline inflation is expected to be 0. above the median economy target by the fourth quarter of 20246 percentage points. Most of these economies are expected to reach their targets by 2025. In several major economies, a downward revision to the projected inflation path, coupled with a modest escalation in economic activity, implies a weaker-than-expected hard landing.
Potential future risks
As the adverse shock eases, the likelihood of a hard landing wanes, and the risks to the global outlook are broadly balanced. While other underlying factors push the risk distribution in the opposite direction, there is room for further upside surprises in global growth.
Upside risk. Stronger-than-expected global economic growth may come from the following factors:
First, faster deflation: In the short term, the risk that inflation will fall faster than expected may become a reality again, with a stronger-than-expected transmission of fuel declines, a further decline in the ratio of job vacancies to unemployed, and a compression of profit margins to absorb past cost gains. Coupled with lower inflation expectations, these developments could allow the central bank to advance its policy easing program, and could also help improve business, consumer and financial market sentiment and boost economic growth.
Second, the pace of fiscal support withdrawal is slower than expected: Major economies** are likely to withdraw fiscal policy support at a slower pace than necessary and assumed in 2024-25, implying that global growth will be higher than expected in the near term. However, such delays are likely to exacerbate inflation in some cases and, as public debt increases, leading to higher borrowing costs and more disruptive policy adjustments, negatively impacting subsequent global growth.
Third, China's faster economic recovery: More property-related reforms (including speeding up the restructuring of bankrupt property developers while protecting the interests of homebuyers) or larger-than-expected fiscal support could boost consumer confidence, boost private demand, and have positive cross-border growth spillovers.
Fourth, AI and supply-side reforms: In the medium term, AI can increase workers' productivity and incomes, although this will depend on how countries harness the potential of AI. Advanced economies are likely to benefit from AI earlier than emerging market and developing economies, largely because their employment structure is more focused on cognitive-intensive jobs. For emerging market and developing economies with constrained policy environments, accelerating supply-side reforms could lead to larger-than-expected domestic and foreign investment and productivity, as well as a faster transition to higher income levels.
Downside risks. There are still some headwinds to global economic growth:
First, geopolitical and weather shocks have led to a spike in commodities**: the conflict in Gaza and Israel could escalate further into the wider region, which produces about 35% of the world's oil exports and 14% of its natural gas exports. Ongoing attacks on the Red Sea (11% of the world's** flows through the Red Sea) and the ongoing war in Ukraine have the potential to create new adverse ** shocks to the global recovery, leading to soaring food, energy and transportation costs. The cost of container transportation has risen sharply, and the situation in the Middle East continues to be volatile. Further geoeconomic developments could also limit the cross-border movement of commodities, leading to further volatility. More extreme weather shocks, such as floods and droughts, can also work with El Niño to cause food ** to soar, exacerbate food insecurity, and jeopardize the global deflation process.
Second, core inflation persists and requires a tightening of monetary policy stance: due to the continued tightness of the labor market and the resurgence of chain tensions, core inflation in major economies is declining at a slower-than-expected rate, which may trigger a rise in interest rate expectations, and such developments in assets may increase financial stability risks, tighten global financial conditions, trigger capital flows to safety, and lead to a stronger dollar, which will adversely affect growth and growth.
Third, China's sluggish growth: Without a comprehensive restructuring policy for the troubled property sector, the decline in real estate investment could be larger than expected and could last longer, negatively impacting domestic growth and partners. Unexpected fiscal austerity due to local** financing constraints is also possible, as well as a reduction in household consumption amid low confidence.
Fourth, a disruptive shift to fiscal consolidation: Many economies must undergo fiscal consolidation to cope with rising debt ratios. But if there is an excessively large shift towards tax increases and spending cuts, more than expected, could lead to weaker than expected growth in the near term. An adverse market reaction could force some countries that lack credible medium-term consolidation plans or are at risk of debt distress to make harsh adjustments. In low-income countries and emerging market economies, the risk of debt distress remains high, limiting the scope of investment necessary to boost growth.
Policy priorities
With inflation falling back to target across the region, the central bank's immediate priority is to achieve a smooth landing that neither cuts too early nor too long. As inflation drivers and dynamics differ across economies, the need for policies to ensure stability is increasingly differentiated. At the same time, in many cases, with rising debt and limited budget room for maneuver, a renewed focus on fiscal consolidation is needed as inflation falls and economies are better able to absorb the effects of fiscal austerity. Stronger supply-side reforms will contribute to inflation and debt reduction, as well as a lasting increase in living standards.
Control the eventual decline in inflation. Inflation is falling faster than expected, prompting more central banks to shift from raising policy rates to adjusting their accommodative stance. Against this backdrop, ensuring that wage and price pressures dissipate significantly and avoid a premature "victory" scenario will prevent a subsequent reversal in the event of an unexpected upside in inflation. At the same time, with underlying inflation and expectations indicators clearly shifting to levels consistent with the target, a move to a more neutral level may be necessary (taking into account the long transmission lag) to avoid a prolonged recession, a weak economy, or a missed economic target. In some emerging market economies, the monetary tightening cycle has paved the way for early rate cuts, so it is appropriate to continue to adjust the pace of monetary adjustment based on a broad set of measures of wage and price pressures. With borrowing costs still high, careful monitoring of funding conditions and being prepared to deploy financial stability tools remain critical to avoid financial sector strain.
Rebuild buffers to cope with future shocks and achieve debt sustainability. With fiscal deficits higher than pre-pandemic levels and high debt-servicing costs, fiscal consolidation in line with a credible medium-term plan and a country-specific pace of adjustment are necessary to restore budget room for manoeuvre. In many cases, there is a need to increase fiscal balance over a sustained period of time, while protecting priority investments and support for vulnerable groups. A well-tuned plan can support the credibility of fiscal policy, allow the pace of consolidation to be adjusted according to the intensity of private demand, and avoid disruptive upfront adjustments. Mobilizing domestic revenues, addressing the rigidity of expenditures, and strengthening institutional fiscal frameworks are likely to support adjustment efforts in economies with large spending needs and other economies. For countries in debt distress or at high risk, orderly debt restructuring may also be necessary. Faster and more effective coordination of debt solutions through the G20 Common Framework and the Global Sovereign Debt Roundtable will help mitigate the risk of contagion of debt distress.
Achieve sustained medium-term growth. Despite limited policy space, targeted and well-orchestrated structural reforms can strengthen productivity growth and reverse the decline in medium-term growth prospects. Reforms that ease the most binding constraints on economic activity can preload the resulting output gains, even in the short term, and ensure public support. Industrial policy can be pursued where identifiable externalities or significant market failures are clearly identified and no other more effective policy options exist, but the policy needs to be consistent with the rules of the World Organization (WTO). Such policies are more likely to succeed if they are accompanied by appropriate overall economic reforms and a good governance framework. Carbon pricing, subsidies for green investment, reduction of energy subsidies, and carbon border adjustment mechanisms can accelerate the green transition, but they must be designed to support consistency with WTO rules. Investments in climate adaptation activities and infrastructure are also needed to support resilience.
Building resilience through multilateral cooperation. Strengthened cooperation in areas of common interest is essential to reduce the costs of the world economy. In addition to coordination on debt resolution, there is a need to work together to mitigate the impacts of climate change and promote the green energy transition, building on the latest agreement reached at the 2023 United Nations Framework Conference on Climate Change (COP28). Further priorities include securing the transport of critical minerals, restoring the WTO's ability to resolve disputes, and ensuring the responsible use of potentially disruptive new technologies, such as artificial intelligence, by upgrading domestic regulatory frameworks and harmonizing global principles. The conclusion of the sixteenth review of quotas by the Board of Governors of the International Monetary Organization (IMO) was a welcome step, and it now required the agreement of member States to increase their quotas.
Global Financial Stability Update
Since the release of the October 2023 Global Financial Stability Report, inflationary pressures have continued to subside, raising expectations that monetary policy in advanced economies will ease in the coming quarters. As a result, interest rate expectations fell sharply in December, driving risk assets broadly**. Global financial conditions have generally eased since October last year, driven by rising valuations, lower volatility, and already compressed corporate bond spreads.
Since October 20223, the net value of global bond yields has fallen sharply, especially on longer-dated bonds. Real interest rates drove the curve downward, reflecting the market's reassessment of the future interest rate environment. For example, the 10-year real interest rate in the United States has reversed its trend to below 2% after rising to pre-global crisis levels. Yields have risen since the start of 2024 as investors have lowered their expectations for the magnitude and pace of monetary policy easing by major central banks.
Investors' optimism about the macro outlook contrasts sharply with the deterioration in borrower credit quality. Bank credit growth has declined as rising interest rates weigh on loan demand in 2023 and banks' risk tolerance continues to decline. At the same time, default rates for some borrowers continued to rise. So far, central banks' balance sheet reduction has been orderly. However, there are signs that the decline in liquidity in the financial system is starting to affect market functioning, particularly in certain short-term funding markets, where US repo financing rates have spiked intermittently over the past few months.
The banking system's exposure to commercial real estate remains a concern, as tepid demand and rising borrowing costs in some economies increase the risk of default for commercial real estate borrowers. The recent bankruptcy of a major European real estate company is a reminder of the fragility faced by the real estate sector in the current environment of volatile interest rates and real estate. Bank of America also faces large unrealized losses available and held to maturity. Despite the year-end occurrence, the price-to-book ratios of U.S. regional banks have yet to fully recover from the turmoil of March 2023.
The correlation between emerging market assets and US Treasury yields has strengthened amid large fluctuations in interest rates. Rising yields in advanced economies have led to emerging-market asset outflows, despite a reversal in local currency assets since November. However, financial conditions in this high-interest rate environment are likely to continue to pose challenges to the economies of some regions, particularly weaker emerging markets and countries with rapidly narrowing interest rate differentials with the United States.