The global economy continues to recover from the pandemic, the Russian invasion of Ukraine and the cost of living crisis. In retrospect, the resilience has been remarkable. Despite wartime disruptions to energy and food markets and unprecedented monetary tightening to combat decades-long inflation, economic activity has slowed but not stagnated. Even so, growth remains slow and uneven, with increasing divergences.
The global economy is limping, not running.
According to our latest projections, global economic growth will slow from 3.5 percent in 2022 to 3 percent this year and 2.9 percent next year, down 0.1 percentage point for 2024 from July. This is still well below the historical average.
Headline inflation continues to slow, from 9.2 percent in 2022 year-over-year, to 5.9 percent this year and to 4.8 percent in 2024. Core inflation, which excludes commodity prices, is also expected to food and energy, decrease, although more gradually. , to 4.5 percent next year. Most countries are not likely to reach the inflation target again until 2025.
As a result, projections are increasingly consistent with a soft landing scenario, which would reduce inflation without a major drop in activity, especially in the United States, where our projected increase in unemployment is now modest at 3.6 percent. to 3.9 percent by 2025.
But important divergences are emerging, leaving activity in some regions well below pre-pandemic projections. The slowdown is more pronounced in advanced economies than in their emerging and developing market counterparts. Among advanced economies, the US growth outlook has been revised upwards, with consumption and investment resilient, while euro area activity has been revised downwards. Many emerging market economies also demonstrated unexpected resilience, with the notable exception of China, which faces growing headwinds from its housing crisis and weakening confidence.
Three forces are at play:
- The services recovery is almost complete and the strong demand that supported service-oriented economies is now weakening.
- Tighter credit conditions are weighing on housing markets, investment and activity, even more so in countries with a higher proportion of adjustable rate mortgages or where households are less willing or able to dip into their savings. Business bankruptcies are increasing in some economies, although from historically low levels. Countries are now at different points in their rate-hiking cycle: advanced economies (except Japan) are near the peak, while some emerging market economies that started raising rates earlier, such as Brazil and Chile, have already begun to make them more flexible.
- Inflation and economic activity are determined by last year’s commodity price shock. Economies that rely heavily on Russian energy imports experienced a steeper rise in energy prices and a steeper slowdown. The pass-through of rising energy prices largely contributed to boosting core inflation in the euro area, unlike in the United States, where underlying inflation pressures instead reflect a tight labor market.
Despite signs of weakening, labor markets in advanced economies remain buoyant and historically low unemployment rates help support activity. Real wages are recovering, but there is little evidence of a
wage-price spiral. Additionally, many countries experienced a strong (and welcome) compression in income distribution, and the increased amenity value of flexible and remote work schedules reduced wage pressures for higher earners.
While some of the extreme risks (such as severe banking instability) have moderated since April, the balance remains tilted to the downside.
China’s housing crisis could intensify, posing a complex policy challenge. Restoring confidence requires quickly restructuring distressed property developers, preserving financial stability and addressing strains on local public finances.
If China’s property prices fall too quickly, bank and household balance sheets will worsen, with the potential for significant financial amplification. Artificially supporting property prices may temporarily protect balance sheets, but this will crowd out other investment opportunities, reduce new construction, and hurt local government revenues due to reduced land sales. Either way,
China’s economy must pivot far from the growth that depends on credit for the real estate sector.
Meanwhile, commodity prices could
become more volatile in the midst of climate and geopolitical crises, a serious risk for disinflation. Between June and the end of September, oil prices had risen about 25 percent amid extended supply cuts by OPEC Plus, the Organization of the Petroleum Exporting Countries and some selected non-members, before retreating about 11 percent. Food prices remain high and could be further affected by an escalation of the war in Ukraine, causing further hardship for many low-income countries. Geoeconomic fragmentation has also led to a sharp increase in the dispersion of commodity prices across regions, including critical minerals. This could pose serious macroeconomic risks, including the climate transition, as we show in
Chapter 3 from our latest World Economic Outlook.
And while both core and headline inflation have declined, they remain uncomfortably high. Short-term inflation expectations have risen markedly above target, although they now appear to be turning a corner. As
Episode 2 According to the details of the WEO report, reducing these short-term inflation expectations is essential to winning the battle against inflation.
Furthermore, fiscal reserves have been eroded in many countries, with high levels of debt, rising financing costs, slowing growth and a growing mismatch between growing demands on the State and available resources.
fiscal resources. This leaves many countries more vulnerable to crises and requires a renewed focus on managing fiscal risks.
Finally, despite the tightening of monetary policy, financial conditions have eased in many countries, as detailed in the latest report.
Global Financial Stability Report. The danger is a sharp revaluation of risk, especially for emerging markets, which would further strengthen the US dollar, trigger capital outflows and increase borrowing costs and debt overhang.
Under our base case, inflation continues to decline as central banks maintain a tight stance and avoid premature easing. Once the disinflation process is firmly established, with decreasing near-term inflation expectations and inflation targets in sight, it will be appropriate to gradually reduce the monetary policy rate, while maintaining a commitment to price stability.
Fiscal policy needs to rebuild reserves, including by eliminating energy subsidies, while continuing to protect the vulnerable. This will also contribute to disinflation. Fiscal and monetary policies moved in the same direction last year, when many pandemic emergency fiscal measures were withdrawn, but this year they are less aligned. The substantial widening of the fiscal deficit in the United States is extremely worrying, since fiscal policy should not be procyclical, especially at this stage of the inflation cycle.
We should also refocus on the increasingly bleak medium-term outlook. Global growth prospects are weak, especially for emerging market and developing economies. The implications are profound: a much slower convergence towards living standards in advanced economies, reduced fiscal space, greater debt vulnerabilities and exposure to shocks, and fewer opportunities to overcome the scars of the pandemic and war.
With lower growth, higher interest rates and reduced fiscal space, structural reforms become key. Greater long-term growth can be achieved with a careful sequence of
reforms, starting with those focused on governance, business regulation and the foreign sector. These first-generation reforms help unlock growth and make subsequent reforms, whether to credit markets or the green transition, much more effective.
Multilateral cooperation can help ensure that countries achieve better growth results. Countries should avoid implementing policies that contravene World Trade Organization rules and distort international trade. And countries should safeguard the flow of critical minerals needed for the climate transition and agricultural commodities. These “green corridors” would help reduce volatility and accelerate the green transition.
Finally, all countries should prevent
geoeconomic fragmentation that impedes progress towards shared prosperity. Instead, they should work to restore confidence in rules-based multilateral frameworks that improve transparency and political certainty. A strong global financial safety net with a well-resourced IMF at the center is essential.