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Wednesday, November 6, 2024

IMF: Inflation Battle Nearly Won, But New Threats Loom

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The International Monetary Fund (IMF) has declared the global battle against inflation nearly won, projecting a decline to 3.5% by the end of 2025. However, this positive news is tempered by rising geopolitical risks and significantly weaker long-term growth prospects, according to their latest World Economic Outlook. While a global recession has been avoided, the IMF stresses the need for continued vigilance and a "policy triple pivot" to navigate the complexities ahead.

Key Takeaways:

  • Inflation Victory, but Challenges Remain: Global inflation is predicted to fall to 3.5% by end-2025, a significant drop from 2024’s average of 5.8%, but this progress is overshadowed by new concerns.
  • Geopolitical Risk and Slow Growth: The IMF flags increasing downside risks, primarily geopolitical instability and subdued long-term growth projections of 3.1% annually by the end of the 2020s – the lowest in decades.
  • Policy Pivot Needed: The IMF advocates for a "policy triple pivot": carefully managing interest rates, adjusting government spending, and implementing reforms to boost productivity.
  • Financial Market Volatility: Market fluctuations, particularly events like the early August sell-off, pose a substantial threat to global economic stability, especially for low-income countries already grappling with high debt.
  • Uneven Recovery: While the US and parts of Asia see stronger growth prospects, boosted by AI investments, Europe and several emerging markets face downgraded outlooks.

IMF Declares Inflation Battle Nearly Won, But Warns of Emerging Risks

The International Monetary Fund (IMF) has delivered a mixed message in its latest World Economic Outlook. On the one hand, the global fight against inflation is nearing victory. The institution projects headline inflation to fall to 3.5% annually by the end of 2025, a sharp decrease from the 5.8% average expected in 2024 and a considerable drop from the peak of 9.4% year-over-year in the third quarter of 2022. This projected figure sits slightly below the average annual inflation rate of the two decades preceding the COVID-19 pandemic, marking a significant achievement in the global economic landscape. The report boldly proclaims, "The global battle against inflation is almost won."

However, this apparently positive assessment is tempered by a significant caveat – a growing range of downside risks that are overshadowing the long-term outlook. IMF chief economist Pierre-Olivier Gourinchas emphasizes this duality, stating, "Despite the good news on inflation, downside risks are increasing and now dominate the outlook." The IMF’s analysis highlights a complex interplay of factors, shifting the focus from inflation control to the challenge of ensuring sustainable and equitable growth in a world facing escalating geopolitical tensions and structural economic headwinds.

The IMF largely attributes the success in curbing inflation to responsive monetary policy implemented by central banks worldwide. This proactive approach, coupled with the normalization of labor market conditions and the unwinding of supply-side shocks, successfully prevented a global recession. The report, however, stresses the importance of continued vigilance. Central banks are urged to remain steadfast in their commitment to reducing inflation to target levels. The IMF highlights the persistence of services inflation, which remains almost double pre-pandemic levels in many countries. This elevated level is partly driven by wage increases in several nations as workers seek to offset the impact of heightened living costs. This phenomenon has already resulted in renewed inflationary pressures in emerging economies like Brazil and Mexico. The report cautions that, "While inflation expectations have remained well anchored this time around, it may be harder next time, as workers and firms will be more vigilant in protecting their standards of living and profits going forward."

Low-income countries pose a particular area of concern. Their economies are highly susceptible to fluctuations in commodity prices, as food and energy costs constitute a larger proportion of household spending. Consequently, they are disproportionately affected by commodity price spikes. Moreover, these countries are increasingly burdened by sovereign debt repayments, significantly limiting their capacity to fund vital public programs and undermining their economic resilience.

The IMF identifies heightened financial volatility as another significant risk that might derail global growth. The report explicitly mentions market sell-offs, like the one observed in early August, as a key indicator of uncertainty clouding the economic outlook. While markets have stabilized since this brief period of downturn, triggered by factors including adjustments in the yen carry trade and weaker-than-anticipated US labor market data, apprehension persists. The IMF notes that "The return of financial market volatility over the summer has stirred old fears about hidden vulnerabilities. This has heightened anxiety over the appropriate monetary policy stance." This market instability, if prolonged, presents a considerable challenge, particularly for low-income countries already facing the strain of high sovereign debt and volatile currency markets. Furthermore, if underlying inflation proves more persistent than anticipated, market turbulence and contagion could escalate, posing a substantial threat to global stability.

Beyond market uncertainty, the IMF warns of other potentially disruptive factors impacting global growth. Geopolitical concerns, primarily the ongoing conflict in the Middle East and potential increases in commodity prices due to geopolitical tensions, pose major threats. The risk of a more substantial contraction in China’s property market along with the potential for interest rates to remain elevated for an extended period also cast a long shadow on the international economy. Finally, a rise in protectionist measures in global trade is cited as another substantial risk of retarding prosperity.

The IMF’s outlook is even less optimistic when considering longer-term prospects. The fund forecasts a tepid annual global growth rate of 3.1% by the end of the 2020s, the weakest in decades. This subdued projection is attributed to several factors, prominently China’s weakened outlook and a deteriorating economic situation in both Latin America and Europe. Furthermore, persistent structural headwinds, such as persistently low productivity and aging populations across several regions, further inhibit growth potential. The report underscores the concerning implications of this slow growth: "Projected slowdowns in the largest emerging market and developing economies imply a longer path to close the income gaps between poor and rich countries. Having growth stuck in low gear could also further exacerbate income inequality within economies."

In conclusion, the IMF’s assessment of global economic conditions presents a complex and multifaceted reality. While the victory over inflation is tantalizingly close, a multitude of challenges and risks remain. The path ahead requires a proactive, multipronged policy approach—the "policy triple pivot"—that acknowledges these challenges and works to address them effectively. Continued vigilance, adaptive policy adjustments and a focus on structural reforms are crucial to navigating the uncertainties of the global economic landscape and fostering a more inclusive and sustainable future.

Article Reference

Sarah Young
Sarah Young
Sarah Young provides comprehensive coverage and analysis of economic trends and policies affecting global markets.

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