The International Monetary Fund said Tuesday that the global economy is on pace for a soft landing this year and 2025 but elections around the world introduce a “high” level of uncertainty to that outlook due to potential changes in trade and fiscal policy.
The IMF said an increase in global tariffs could exacerbate trade tensions, disrupt global supply chains, and weigh down medium-term growth prospects by limiting positive spillovers from innovation and technology transfer that once fueled growth in emerging markets and developing economies.
“The level of uncertainty surrounding the outlook is high,” according to the IMF. “Newly elected governments (about half of the world population has gone or will go to the polls in 2024) could introduce significant shifts in trade and fiscal policy.”
In the US, tariffs are a key part of Donald Trump’s agenda should he be elected president in November. Tariffs are taxes that are paid by importers at points of entry, with the additional costs levied on these companies often passed on to consumers.
The IMF estimates in its new World Economic Outlook report that global growth will tick down to 3.2% in 2024 from 3.3% in 2023 and hold at 3.2% next year. The outlook is nearly unchanged from the spring of 2024.
Growth is projected to be higher than previously thought in the US and China this year while Europe also recovers. The IMF noted that global inflation is retreating, largely thanks to the effects of higher interest rates imposed by central banks.
Global inflation is expected to decrease this year and next due to a broad-based decline in core inflation, which excludes volatile food and energy prices. Core inflation is expected to drop by 1.3% this year, following a 0.1 percentage point drop last year.
The IMF raised its outlook for the US economy by 0.2% in 2024 due to strong increases in wages and robust consumer spending, resulting in growth of 2.8% for the year.
But the IMF expects growth in the US to slow to 2.2% next year as the job market cools and consumers slow spending. That’s slightly more optimistic than the Federal Reserve’s forecast for growth of 2% next year.
In Europe, the IMF sees growth picking up this year to 0.8%, before rising a bit more by 1.2% next year, helped by stronger domestic demand.
China’s economy — weighed down by property weaknesses and languishing consumer confidence — is projected to see a gradual slowdown. Better-than-expected exports are predicted to fuel GDP of 4.8% this year, 0.2% higher than previously forecast.
China’s government’s efforts to stimulate the economy could offer another boost, according to the IMF.
Still, a litany of risks could derail global growth — from a deeper contraction in China’s property sector to renewed spikes in commodity prices as a result of climate shocks, regional conflicts, or broader geopolitical tensions.
Fiscal deficits
Looking ahead, economic growth in the medium term is expected to be anemic given a combination of lower growth and constraining high debt, according to the IMF.
Over the remainder of the decade, global growth is expected to remain broadly flat — decelerating from 3.3% in 2023 to 3.1% by 2029 — and is largely unchanged from the IMF’s forecast in April 2024 and October 2023.
Structural challenges such as population aging, weak investment, and historically low total factor productivity growth are still holding back global growth.
For many advanced and emerging economies, the five-year forecast is weaker than the one-year forecast, suggesting that headwinds to growth will persist over the medium term.
The IMF, as a result, is calling on countries to get their fiscal houses in order. Fiscal deficits and government debt are still above what they were before the pandemic, and debt service costs remain high and rising in many countries.
The IMF expects the US fiscal deficit to be only marginally trimmed, remaining at about 6.1% in 2029, with about half of this reflecting interest rate expenses. Under current policies, the IMF sees US public debt as not stabilized, reaching almost 134% of GDP in 2029.
In the euro area, on the other hand, the debt-to-GDP ratio is expected to have stabilized already at about 88% in 2024, although with some cross-country differences.
