The International Monetary Fund (IMF) maintained its 2024 global growth forecast at 3.2% in its World Economic Outlook update released Tuesday, despite downgrading projections for the United States and Japan.
However, the Fund cautioned about persistent inflation risks and potential trade tensions on the horizon.
While the headline number remained unchanged, the revised outlook highlighted a shift in fortunes among major economies. The IMF trimmed its 2024 US growth forecast by 0.1 percentage point to 2.6%, reflecting softer-than-expected consumer spending in the first quarter. Slower job growth and spending moderation due to tighter monetary policy are expected to further cool the US economy in 2025, with growth holding steady at 1.9%.
“Growth in major advanced economies is converging as output gaps close,” said IMF chief economist Pierre-Olivier Gourinchas, noting a potential slowdown in the US as Europe rebounds.
In contrast, China’s prospects received a significant boost. The IMF raised its 2024 and 2025 growth forecasts for China to 5.0% and 4.5%, respectively, aligning with the Chinese government’s target. This revision reflected a strong first quarter for Chinese exports and a rebound in private consumption. However, concerns remain as China reported weaker-than-expected second-quarter GDP growth of 4.7%, potentially signalling softening domestic demand.
“The weaker the domestic demand in China, the more the reliance on the external sector for growth,” Gourinchas said, raising the spectre of renewed trade tensions.
On a brighter note, the eurozone received a slight upgrade with 2024 growth expected to reach 0.9%, followed by 1.5% in 2025.
The IMF believes the eurozone has bottomed out, citing stronger services growth in the first half and rising real wages that should support consumption next year. Easing monetary policy is also expected to aid investment.
Japan, however, saw its 2024 growth forecast downgraded to 0.7% due to supply disruptions stemming from a major auto plant shutdown and weak private investment.
The IMF warned of potential upside risks to inflation as wage growth in the labour-intensive sector keeps service prices elevated. Renewed trade and geopolitical tensions could further exacerbate price pressures by disrupting supply chains and increasing import costs.
“The risk of elevated inflation has raised the prospect of higher interest rates for longer, which in turn increases external, fiscal, and financial risks,” the report stated.
While US consumer prices fell last month, Gourinchas advised the Federal Reserve to remain cautious about cutting rates too soon to avoid reigniting inflation.
The Fund also expressed concern over potential shifts in economic policy arising from the numerous elections scheduled this year, which could negatively impact the global economy.
“These potential shifts could lead to fiscal profligacy, worsening debt dynamics, adversely affecting long-term yields, and escalating protectionism,” the report highlighted.
The IMF refrained from naming specific candidates or policies, but emphasized that increased tariffs and domestic industrial policies could lead to “damaging cross-border spillovers and retaliatory measures, ultimately resulting in a costly race to the bottom.”
Instead, the IMF urged policymakers to prioritize price stability through gradual monetary policy adjustments, replenish fiscal buffers depleted during the pandemic, and pursue policies that promote trade and productivity growth
