IMF: The world economy is approaching a soft landing, and central banks of various countries face dual risks in monetary policy

On January 30, the International Monetary Fund (IMF) raised the world economic growth rate in 2024 to 3.1% from the 2.9% predicted in October last year in the latest World Economic Outlook Report. The speed is expected to be 3.2%.

The global economy is heading for a soft landing

The IMF pointed out in the report that the global economy has shown sufficient resilience since the second half of 2023. On the demand side, strong private consumption and government spending compensated for tight monetary conditions and supported economic activity; on the supply side, rising labor force participation, improving supply chains, and lower energy and commodity prices compensated for the resumption of economic activity. negative impact of geopolitical uncertainty.

With economic growth remaining stable and inflation declining steadily, the IMF believes that the global economy will eventually move towards a soft landing and the risk of a hard landing has weakened.

Specifically, the report predicts that U.S. economic growth will gradually slow down, from 2.5% in 2023 to 2.1% and 1.7% next year. Tight monetary policy will still play an important role in the U.S. economy; while the euro area It will begin to rebound slightly after the challenging 2023, with growth rates expected to be 0.9% and 1.7% respectively this year and next. High energy prices and tight monetary policy limited demand in the euro zone last year; driven by India and Southeast Asia , Asia's emerging economies are expected to still lead the world in 2024 and 2025, with growth rates of 5.2% and 4.8% respectively. India's expected growth rate of 6.5% for two consecutive years is the highest among major economies.

As for inflation, the IMF lowered this year's global inflation rate (excluding Argentina) to 4.9% from its forecast of 5.3% in October last year. Among them, the core inflation rate in advanced economies is expected to fall to 2.6% this year, which is closer to the 2% medium-term target set by the Federal Reserve and the European Central Bank.

In addition to the two core factors of slowing economic growth and inflation, the report also pointed out that 2024 and 2025, as global election years, usually mean that governments will increase public spending. Although it may partially stimulate inflation, it is more likely to Will boost economic activity. Rapid advances in artificial intelligence can also boost investment and spur rapid productivity growth.

Although the global economy shows many positive factors, the growth rates of 3.1% and 3.2% in 2024 and 2025 are still lower than the average level of 3.8% from 2000 to 2019.

The IMF lists the shrinking fiscal expenditures under the impact of high interest rates and high debt, as well as the low growth of basic productivity as the main reasons affecting economic growth. In addition, geopolitical tensions have also re-emerged. For example, conflicts in the Middle East may disrupt the supply of commodities, and the Red Sea crisis has also caused a significant increase in transportation costs between Asia and Europe. Core inflation that may be more persistent depends on the impact of wage increases on prices. In particular, the rise in negotiated wages in the Eurozone may put pressure on prices again, while monetary policy that tends to maintain higher interest rates for a longer period of time may also It would put pressure on government debt, and fiscal consolidation could weigh on economic growth.

The dual risks of monetary policy

The report also noted that much of the recent slowdown in inflation has been caused by falling commodity and energy prices, rather than a contraction in economic activity. This also means that tight monetary policy may have limited effectiveness in controlling inflation by curbing demand.

However, the IMF still affirmed the positive role of central banks in various countries in rapidly raising interest rates in two aspects. First, the determined and rapid pace of interest rate hikes strengthens the outside world's trust in the central bank's determination to control inflation and prevents inflation expectations from continuing to rise, which helps curb wage growth and reduce the risk of a wage-price spiral. Second, austerity policies directly reduce global energy demand and depress headline inflation.

Currently, central banks of various countries are facing dual risks. On the one hand, premature implementation of easing policy will weaken the central bank's credibility gains and may lead to a rebound in inflation; on the other hand, failure to turn to monetary normalization in time will endanger economic growth and bring about the risk that inflation will quickly fall below the medium-term target, and inflation will Some emerging economies that have experienced sharp declines have begun to cut interest rates.

The report believes that U.S. inflation is driven to a greater extent by demand, so the Federal Reserve needs to guard against the first type of risk; while inflation in the Eurozone is due to the surge in energy prices playing a disproportionate role, so the European Central Bank should pay more attention to the second type of risk. risk.

This also seems to indicate that the European Central Bank, which starts its interest rate hike cycle later than the Fed, is more likely to start cutting interest rates before the Fed.

European Central Bank President Lagarde also revealed after the monetary policy meeting on January 25 that she "ensures that its policy interest rates remain at a sufficiently stringent level when necessary." It is also widely predicted that the European Central Bank will not discuss the possibility of cutting interest rates before April. Although Wall Street institutions represented by Morgan Stanley do not expect the Federal Reserve to start cutting interest rates before June, they are betting that the Federal Reserve will announce a slowdown in balance sheet shrinkage at the May monetary policy meeting to achieve a slight easing of monetary policy. This comparison is in some sense quite different from the IMF's forecast.

The IMF also pointed out that rising fiscal risks are the biggest challenge it will face in the future.

In the face of the COVID-19 epidemic and the energy crisis, governments around the world have adopted a series of relief measures to help people and businesses, pushing up public debt levels along the way. For example, the ratio of public debt to GDP in the G20 developed economies has exceeded 120% in the past four years, and the ratio in the G20 emerging economies has also exceeded 70%. As interest rates rise sharply, borrowing and refinancing costs in various countries are rising disproportionately.

However, with the currency depreciation caused by inflation, the total debt of some highly indebted countries has actually shown a rapid shrinking trend after hitting a new high during the epidemic. A report by Eurostat on January 22 showed that the ratio of public debt to GDP in the euro area dropped from 92.2% in the third quarter of 2022 to 89.9% in the third quarter of 2023, including the former "European pig countries" Greece and Portugal's debt-to-GDP ratio fell by 12 and 10.9 percentage points respectively in the past year.