The IMF paints a brighter picture of the global economy, upgrading its growth forecast and seeing lower inflation

WASHINGTON (AP) — The International Monetary Fund has upgraded its outlook for the global economy this year, envisioning resilient U.S.-led growth and a slower pace of inflation.

In its latest outlook, the 190-country lending institution said Tuesday it expects the global economy to grow 3.1% this year, unchanged from 2023 but better than the 2.9% it forecast for 2024 in its previous estimate in October.

Globally, the IMF sees inflation slowing from 6.8% in 2023 to 5.8% in 2024 and 4.4% in 2025. In more advanced economies, the agency expects inflation to slow to 2.6% this year and 2% next year. The Federal Reserve and some other central banks have set targets.

The combination of steady growth and falling inflation has raised hopes for a so-called soft landing in the global economy — just enough slack to contain inflation without causing a recession.

„We are now on the final descent towards a soft landing,” IMF chief economist Pierre-Olivier Gourinchas told reporters ahead of the report's release.

The overall global growth forecast for this year and next (3.2%) is above the 2000 to 2019 average of 3.8%. This is because the Fed and other central banks have aggressively raised interest rates to combat high inflation, resulting in higher borrowing costs and slower spending and investment.

Gourinjas said he expects „relatively limited” economic damage from Yemen-based Houthi rebels' attacks on shipping in the Red Sea. The attacks forced container ships carrying cargo between Asia and Europe to avoid the Suez Canal and instead take the long route around the tip of Africa, delaying and disrupting exports and raising freight rates. But for now, Gourinchas said, Red Sea disruptions do not appear to be „a major source of re-igniting supply-side inflation.”

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For the US, the world's largest economy, the IMF sharply marked its estimate for growth this year – to 2.1% from 1.5% three months ago. The U.S. economy expanded 2.5% in 2023 after an unexpected burst of year-end growth, fueled by consumers willing to spend despite higher borrowing costs.

The outlook for the slowing Chinese economy was also upgraded by the IMF. It now expects the world's second-largest economy to grow 4.6% this year, down from the 4.2% it forecast in October and 5.2% growth in 2023. Government spending has helped offset the impact of a slump in China's housing market. .

„There was a lot of backlash in many, many parts of the world,” Gourinchas said, singling out Brazil, India, Southeast Asia and Russia, which have remained surprisingly resilient in the face of Western sanctions imposed after its invasion of Ukraine.

But the IMF downgraded the outlook for some places. Europe, for example, continues to struggle with the lingering effects of an energy price shock caused by the Russian invasion of Ukraine and disillusioned consumers. The IMF expects the 20 countries that share the euro currency to grow by a combined 0.9% this year. That would be up from 0.5% growth in 2023, but down from the IMF's October forecast of 1.2% growth for the eurozone this year.

The IMF lowered its outlook for the Japanese economy to 0.9% growth in 2023 from 1.9% growth.

The improving inflation outlook is a result of higher interest rates, the end of supply chain setbacks over the past two years, more workers entering the job market and lower energy prices since the height of the Ukraine war. The IMF expects oil prices, which fell 16% in 2023, to fall another 2.3% this year and 4.8% in 2025.

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The global economy still faces risks. For one, financial markets are highly optimistic that the central bank will reverse course and start cutting rates before its meeting in March. Gourinchas said he does not expect rate cuts to begin until the second half of 2024. Disappointed investors can push stock prices lower if they don't see lower rates sooner than they expected.

Another is that geopolitical tensions, particularly between the US and China, could disrupt global trade. Gourinchas suggested that some of President Joe Biden's economic policies, which benefit U.S. manufacturers of computer chips and green technology, could violate World Trade Organization rules.

The IMF expects world trade to grow by just 3.3% this year and 3.6% in 2025, below the historical average of 4.9%.

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