The IMF-World Bank meetings took place in Washington D.C. last week. As usual, this was an occasion to revisit the outlook for growth and inflation at the global level, and to re-evaluate the policy paths chosen by many countries. The updated forecasts for the global economy are reported in the latest edition of the World Economic Outlook (WEO). As the IMF Chief Economist wrote in his blog, they show that “the global economy remained unusually resilient throughout the disinflationary process. Growth is projected to hold steady at 3.2 percent in 2024 and 2025,” while “some low-income and developing economies have seen sizable downside growth revisions, often tied to intensifying conflicts.”
When looking at specific countries or regions, US GDP growth is expected to remain “strong, at 2.8 percent this year, but will revert toward its potential in 2025.” In the Eurozone, “a modest growth rebound is expected next year, with output approaching potential.” In emerging markets and developing economies, the growth outlook remains positive, “around 4.2 percent this year and next, with continued robust performance from emerging Asia.”
While labour markets have shown remarkable resilience, with unemployment rates at or close to their lowest levels of recent decades, according to the IMF the battle against inflation has been “largely won, even if price pressures persist in some countries”. After peaking at 9.4% in Q3 2022, headline inflation is now expected to fall to 3.5% by the end of 2025; i.e., “slightly below the average during the two decades before the pandemic. In most countries, inflation is now hovering close to central bank targets, paving the way for monetary easing across major central banks.”
This is where the IMF requires countries to make a triple policy pivot. First, with inflation falling, central banks have no reason to continue keeping rates as high as they have been in the last couple of years. For this reason, the ECB has already cut rates in June, September and even October (which in September seemed not to be a “live meeting”). The Fed too has cut rates once, in September, surprising the market with a 50bps cut, when the market had been expecting a 25bps reduction. Among the largest advanced economies, the BoE also cut rates, in August 2024, and is expected to follow suit in November.
As monetary policy becomes easier, governments should start a process of gradual fiscal consolidation, to reduce the large fiscal deficits and public debts accumulated during the pandemic and the initial phases of Russia’s aggression against Ukraine. It is remarkable how investors are not worried by the increasing fiscal deficit of the US (the third largest in history), and by its public debt, which has reached the astronomical figure of USD 35tn, or 124% of GDP.
As the IMF says, “the third pivot—and the hardest—is toward growth-enhancing reforms,” centred around the common goal of “enhancing productivity, as this is the only way we can address the many challenges we face: rebuilding fiscal buffers; coping with aging and shrinking populations in many parts of the world; tackling the climate transition; increasing resilience, and improving the lives of the most vulnerable, within and across countries.” This would be the time to implement those reforms, as growth is still acceptable, the unemployment rate is low, and inflation is under control. But the political economy of structural reforms remains complicated: it is very hard to find any elected politician willing to impose a sacrifice today, which will bear fruits only many years later, when he or she will no longer be in power.
The IMF has made predictions and policy recommendations ahead of the defining moment of this year, the US election, which was at the centre of every discussion during the meetings. While Harris would guarantee a higher degree of policy continuity, Trump is likely to be severely disruptive again. But we will discuss the effects of a Trump presidency only if this event materialises.
