After peaking at 9.4% year-on-year in the third quarter of 2022, The International Monetary Fund now projects that global inflation will fall to 3.5% by the end of next year. This is a level slightly below the average recorded during the two decades prior to the pandemic. Hence I consider that ““It appears that the global battle against inflation has largely been won.”according to the economic advisor Pierre-Olivier Gourinchas when presenting this Tuesday the update of the World Economic Prospects report.
Thus, in many countries, inflation is currently close to the objectives of central banks, “paving the way for monetary easing.”
The multilateral organization highlights in its report that The global economy remained unusually resilient throughout the deinflationary process.. Project that growth will remain stable at 3.2% in 2024 and 2025. However, it warns that some low-income countries and developing economies have experienced significant downward revisions to growth, often linked to escalating conflicts.
Among the advanced economies, the United States stands out, with a growth forecast of 2.8% in 2024. The outlook for emerging markets is stable with forecasts of 4.2% growth for both the current and next year. In this group, the “robust” performance of Asian nations stands out.
When analyzing the inflation slowdown process, the Fund highlights that monetary policy played a decisive role in keeping expectations anchored and thus avoiding the disastrous spiral of prices and wages (such as the one recorded in the 1970s).
Risks
YetPierre-Olivier Gourinchas warned of possible risks. Among them, “an escalation of regional conflicts, especially in the Middle East, could pose serious risks to commodity markets”. He also maintained that changes towards undesirable trade and industrial policies may significantly reduce production relative to the Fund’s base forecast. Finally, “Monetary policy could remain too tight for too long and global financial conditions could tighten abruptly.”
The economist considered that the return of inflation to levels close to the central banks’ objectives paves the way for a triple pivot of politics. One is the monetary one, currently underway, with most central banks in developed countries starting to cut their interest rates since last June. These cuts tend to sustain activity at a time when a “cooling” is observed in the labor markets of these nations, with a gradual increase in the unemployment rate.
It is considered that this reduction in interest rates will aim to strengthen the currencies of emerging economies against the dollar, helping to reduce imported inflation.
The second axis is fiscal, a central aspect for the Fund. In this regard, he considered that it is time to stabilize the debt dynamics and rebuild the much-needed fiscal reserves.
The third turn – and the most difficult according to Gourinchas – consists of moving towards reforms that improve growth. The agency believes that much more needs to be done to improve growth prospects and raise productivity, as this is the only way to address the many challenges facing the global economy.
That is, rebuild fiscal reserves; address aging and declining populations in many parts of the world; addressing the climate transition; increase resilience and improve the lives of the most vulnerable.
“Unfortunately, growth prospects for the next five years remain mediocre: 3.1%, the lowest level in decades”said the economist.
The Fund’s report concludes that “economic growth must come from ambitious domestic reforms that boost technology and innovation, improve competition and resource allocation, deepen economic integration and stimulate productive private investment”. He adds that these reforms often face significant social resistance, which explains the need for building trust between the government and including adequate compensation to offset potential damages.
Source: Ambito
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