On the 16th, the International Monetary Fund (IMF) published its quarterly “World Economic Outlook (WEO; April 2024)” report. The report projects the global economic growth rate for 2024 to be revised upward by 0.1% to an annual rate of 3.2%. In the short term, the US economy’s strength is expected to drive good performance, but mid-term challenges in productivity are anticipated, leading to a slowdown. Consequently, the global economic growth rate for 2029 is projected to be slightly reduced to 3.1%. This forecast, five years ahead, is the lowest in decades and significantly below the 3.8% average from 2000-2019.
The Wall Street Journal (WSJ) noted that the IMF’s current WEO report indicates that the global economic outlook for this year is mainly positive due to the strong US economy, but mid-term growth prospects are “less rosy.” This is primarily attributed to potential constraints in labor supply, with global labor supply growth expected to reach only 0.3% annually, less than one-third of the pre-pandemic decade average. Other factors include reckless debt increases in some countries to meet investment demands, trade contraction due to geopolitical divisions, and widening gaps between advanced and poor countries. Poor countries, with limited fiscal response capacity, have been severely impacted by the pandemic, facing steep price increases in essential goods like food, energy, and fertilizers.
Global Economic Growth Accelerates, but Poor Countries Lag Further Behind
The IMF report asserts that the global economy maintains robust growth despite uneven progress across regions, with various indicators suggesting a soft landing. The 2024 growth rate forecast has been revised upward consecutively twice. However, the 2025 growth rate forecast remains unchanged from the previous prediction.
Regarding the global high inflation issue, the report predicts gradual easing. Global inflation is expected to decrease from 6.8% in 2023 to 5.9% in 2024, and further to 4.5% in 2025. Advanced economies are anticipated to reach their inflation targets soon, ahead of emerging and developing economies.
The report significantly revises its outlook for the US economy, which accounts for a quarter of the global economy. The 2024 growth rate is raised by 0.6% to 2.7%, indicating a remarkable recovery exceeding pre-COVID-19 levels. The 2023 growth rate, previously projected at 2.1%, actually reached 2.5%, underpinning further acceleration. Between 2019 and 2025, the US real GDP is expected to grow by 13%, contrasting sharply with Japan’s 1.8% and Germany’s 2.2%.
Emerging markets also generally maintain stability, benefiting from a disinflation trend since the 2022 inflation peak and overcoming stagflation and global recession fears despite rapid interest rate hikes by central banks. This recovery is expected to continue through 2024-2025, with advanced economies growing steadily at 1.7% in 2024 and 1.8% in 2025. In contrast, the Eurozone and China’s economies continue to struggle, with increased risks for poor countries. Consequently, emerging economies’ growth is projected to slow from 4.3% in 2023 to 4.2% in 2024 and 2025.
Over the next five years, global economic growth is expected to slow to 3.1%, the lowest mid-term forecast in decades and significantly below the 3.9% average from 2000-2019. Lower economic growth typically means income stagnation and difficulty improving living standards, particularly in developing countries. Achieving a decarbonized society through economic restructuring also becomes more challenging.
Mid-term Outlook Deteriorates; Calls for ‘Market Competition and Free Trade,’ and Structural Reforms
The IMF emphasizes the need for governments to prioritize structural reforms that promote market competition and free trade, and shift workers to growth sectors to regain growth potential. For example, in the US and Japan, government-led industrial policies targeting specific sectors may hinder labor and capital flow into high-productivity areas, warranting cautious policy implementation.
Mid-term, global growth engines are expected to lose momentum, with economic growth trends slowing. Key reasons include widespread declines in global total factor productivity (TFP), inefficient labor and capital allocation among companies, and sluggish private sector capital formation due to demographic pressures. Without adequate policy measures and slower advancements in high-tech fields, mid-term global economic growth is projected to fall below pre-COVID-19 levels.
Additionally, concerns are raised about the potential division of the global economy, particularly between the US-Europe bloc and the Russia-China bloc, leading to low growth risks. The report notes that trade between these blocs has contracted more significantly than within the blocs since Russia’s invasion of Ukraine.
The report also highlights the importance of the so-called “G20 emerging economies” which account for one-third of global GDP and about one-quarter of global trade. The shocks from these economies, particularly China, have nearly matched those of advanced economies since 2000. The IMF stresses the need for policymakers to prepare adequately for the transmission of these economic shocks.
Calls for Decisive Measures Against Excess Demand in the US and Prolonged Real Estate Slump in China
The IMF report acknowledges that despite the gloomy outlook due to the COVID-19 pandemic, supply chain disruptions, and high inflation, governments have managed to realize a soft-landing scenario through coordinated tightening policies, including significant interest rate hikes. However, the IMF advises caution in easing these measures, given the many challenges ahead.
Specifically, the IMF warns the rapidly recovering US economy to manage excess demand and maintain “sustainable fiscal” operations. The US Congressional Budget Office (CBO) projects that the US fiscal deficit will surge to $45.7 trillion by 2033, reaching 114% of GDP, driven by expanded infrastructure investment during the COVID-19 crisis.
China’s chronic real estate slump is also highlighted, with the IMF stressing that merely repeating “credit booms and busts” won’t solve the problem quickly. A robust approach is needed to address the underlying causes of domestic demand stagnation. Meanwhile, as domestic demand remains weak, external surpluses may increase, exacerbating geopolitical tensions.
Gourinchas Warns Nations to Pursue Fiscal Consolidation ‘Immediately’
The IMF calls on countries to prioritize fiscal consolidation to secure fiscal leeway and support inflation control. With significant improvements in productivity and employment, and strong personal consumption and fiscal spending, stringent fiscal tightening is recommended to curb inflation. With major elections looming this year, there are concerns about fiscal expansion and sustained high inflation.
Geopolitical issues, such as the potential escalation of the Middle East situation, are identified as the most acute global economic risks. The report warns that geopolitical tensions could trigger new supply shocks, negatively impacting economic recovery.
Based on these analyses, Gourinchas, the IMF’s chief economist, suggests four key priorities for policymakers to maintain and expand the current recovery momentum:
- Secure fiscal buffers through ‘fiscal tightening,’ emphasizing the importance of proactive measures before markets become overwhelming. Countries with urgent balanced budget needs include the US, UK, South Korea, and Indonesia.
- Reverse the mid-term outlook decline by enhancing resource allocation efficiency. Structural reforms to attract foreign direct investment (FDI) and facilitate domestic resource movement are recommended, particularly for low-income countries.
- Maintain the hard-won independence of central bank policies to preserve global financial system resilience and prevent a resurgence of inflation.
- Expand ‘green’ investments, urging emerging and developing countries to replace fossil fuel investments with green initiatives, supported by technology transfers and financial aid from advanced countries.
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