IMF Holds Global Growth Forecast; Warns of Uncertain Outlook

On October 22nd local time, the International Monetary Fund (IMF) forecasted in its "World Economic Outlook Update" that the global economic growth rate would stabilize at 3.2% for the years 2024 and 2025, almost maintaining the predictions made by the organization three months prior (remaining unchanged and 0.1 percentage points lower, respectively). However, beneath the seemingly calm surface lies hidden danger, as the global economic outlook is not satisfactory.

The report indicates that the growth rate expectations for developed economies in the current and next years are 1.8%, which is essentially unchanged from the forecasts made three months ago. In reality, the upward revision of the U.S. economic outlook offset the downward revision of expectations for other developed economies, particularly the largest European countries.

The U.S. economic growth rate is expected to be 2.8% and 2.2% for the current and next years, respectively, which is 0.2 and 0.3 percentage points higher than the forecasts made three months ago. In contrast, the Eurozone's growth rates for the current and next years are 0.8% and 1.2%, respectively, which are 0.1 and 0.3 percentage points lower than the forecasts made three months ago. Within the Eurozone, Germany's growth rates for the current and next years are 0% and 0.8%, respectively, which are 0.2 and 0.5 percentage points lower than the forecasts made three months ago; France's growth rates for the current and next years remain stable at 1.1%, which is 0.2 percentage points higher and 0.2 percentage points lower than three months ago, respectively.

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Relatively speaking, the outlook for emerging markets and developing economies is more stable, with growth rate expectations of 4.2% for both the current and next years, essentially maintaining the organization's previous forecasts. Among them, the prospects for the Middle East and Central Asia, as well as Sub-Saharan Africa, are mainly affected by disruptions in the production and transportation of commodities (especially oil), conflicts, civil unrest, and extreme weather events. However, at the same time, the surge in demand for semiconductors and electronic products, driven by significant investments in artificial intelligence, has promoted growth in Asian emerging markets.

Among emerging markets, China's growth rate expectations for the current and next years are 4.8% and 4.5%, respectively, which are 0.2 percentage points lower and unchanged compared to three months ago; India's growth rates for the current and next years are 7.0% and 6.5%, respectively, unchanged from three months ago.

Pierre-Olivier Gourinchas, Chief Economist and Director of Research at the IMF, warned at a press conference that the global economy still faces severe downside risks. "Escalation of regional conflicts, especially in the Middle East, could pose serious risks to commodity markets. A shift towards unpopular trade and industrial policies could significantly lower output below our baseline forecast. Monetary policy may remain overly tight for too long, and global financial conditions could tighten abruptly," he said.

The IMF's latest forecast for global growth over the next five years is 3.1%, which is still mediocre compared to the average level before the pandemic. Moreover, ongoing structural headwinds such as population aging and weak productivity are hindering the potential growth of many economies.

"The global fight against inflation has essentially been won"

"The global battle against inflation seems to have essentially been won. Achieving a decline in inflation without a global recession is a significant accomplishment," Gourinchas emphasized, noting that the global economy has maintained unusual resilience throughout the anti-inflation process.

The report shows that after reaching an annual year-on-year peak of 9.4% in the third quarter of 2022, the overall inflation rate is expected to drop to 3.5% by the end of next year, slightly below the average level of the 20 years before the pandemic outbreak.Looking back on the battle against inflation, he believes that monetary policy played a decisive role in stabilizing inflation expectations, avoiding a harmful wage-price spiral, and preventing a repeat of the disastrous inflation experience of the 1970s.

"Currently, in most countries, inflation is hovering near the central bank's target level, paving the way for monetary easing policies of major central banks," he said.

However, he also warned to be highly vigilant about the resurgence of inflation. "Inflation in the service sector of many countries is still too high, almost double that of before the pandemic. A few emerging market economies are facing a resurgence of inflationary pressures and have begun to raise policy rates again."

Moreover, the future battle against inflation may be more difficult. "We have now entered a world dominated by supply disruptions—climate, health, and geopolitical tensions. In the face of such shocks that simultaneously lead to price increases and output reduction, monetary policy is always more difficult to suppress inflation," he also said, "Although this time inflation expectations have remained stable, it may be more difficult next time because workers and businesses will be more vigilant in protecting wages and profits."

The Federal Reserve's rate cut will ease pressure on emerging markets.

The monetary policy of the United States remains the focus of the current market. Gulinchas pointed out that since June, major central banks of developed economies have started to lower policy rates and shift to a neutral stance, which will support economic activity. "Currently, many developed economies' labor markets show signs of cooling, with unemployment rates continuously rising. However, so far, the rise in unemployment rates has been gradual and does not indicate an imminent economic slowdown."

With the Federal Reserve expected to reduce interest rates to a neutral level by 2025, reaching a range of about 3%-3.25%, a benign slowdown in the labor market and a soft economic landing remain the institution's basic assumption.

Under the basic scenario, the U.S. economy will fall into a recession next year. If this scenario becomes a reality, the U.S. Treasury yield curve may maintain a fully steep trend. However, it is also possible for the economy to accelerate again and end the rate cut early. Therefore, as the probabilities of various outcomes change, investors may need to adapt to the situation and remain cautious about risk conditions.

Regarding the spillover effect of the Federal Reserve's policy, Gulinchas pointed out that the rate cut by major economies will ease the pressure on emerging market economies, their currencies will strengthen against the dollar, and financial conditions will improve. This will help reduce imported inflation, allowing these countries to more easily embark on their own anti-inflation path.

As long as the Federal Reserve continues to cut interest rates, the dollar exchange rate against Asian currencies may end lower at the end of 2024. This scenario will be consistent with their outlook at the beginning of the year and may also be the main trend in 2025.He added that the main risks in this situation are a more hawkish stance from the Federal Reserve and an increase in geopolitical risks due to the U.S. election or an escalation in the Middle East. However, any rebound in the U.S. dollar in the fourth quarter or early 2025 is likely to be temporary.

"Asian currencies may continue to outperform other emerging market currencies in the fourth quarter and 2025, as this is usually the case during the Fed's rate-cutting cycle, unless the euro performs exceptionally well or there is a commodity boom. Before the end of the year, the Malaysian ringgit may remain the best-performing Asian currency and is expected to benefit from any oil price shocks. In the fourth quarter, currencies in Northeast Asia that are more affected by the stock market may have room for appreciation," said Zhao Zhixuan.

Global public debt to exceed $100 trillion

The IMF warned in its latest Fiscal Monitor report that global public debt is at a high level. The report predicts that by the end of this year, the scale of global public debt is expected to exceed $100 trillion (93% of global GDP); by 2030, it will approach 100% of GDP. This is 10 percentage points higher than the ratio in 2019 (before the COVID-19 pandemic).

The report shows that the situation varies from country to country, with public debt expected to stabilize or decline in two-thirds of countries, but future debt may even exceed the forecast level. To stabilize or reduce debt with a higher probability, fiscal adjustments much larger than currently forecast are needed.

The report believes that countries should now implement well-designed fiscal policies to address debt risks, protect economic growth, and ensure vulnerable households, while taking advantage of the easing cycle of monetary policy.

"After years of loose fiscal policies in many countries, it is time to stabilize debt dynamics and rebuild much-needed fiscal buffers. Although the decline in policy rates has provided some fiscal relief by reducing financing costs, this is not enough, especially when long-term real interest rates are still far higher than pre-pandemic levels," said Gulinchas.

He further pointed out that in many countries, the primary balance (the difference between fiscal revenue and public expenditure after deducting interest payments) needs to be improved. For some countries, including the United States, the current fiscal plan cannot stabilize debt dynamics. In many other countries, despite the early fiscal plan showing hope after the pandemic and cost of living crisis, there are more and more signs of decline.

He emphasized that the path to fiscal adjustment is narrow, and delaying rectification will increase the risk of market disorderly adjustment, while a sudden shift to fiscal austerity will backfire and damage economic activity.

IMF analysis shows that the current fiscal adjustment (with an average scale of 1% of GDP over six years by 2029) cannot significantly reduce debt or stabilize it with a higher probability, even if fully implemented. On average, an economy needs to implement a cumulative austerity of about 3.8% of GDP during that period to ensure debt stability with a higher probability. In countries where debt is not expected to stabilize (such as the United States), the efforts required by authorities are much greater.