Growth holds firm, soft landing on the horizon
Global economic worries ease as. . .
The International Monetary Fund (IMF) has released its latest World Economic Outlook (WEO) update, forecasting global growth to remain at 3.1 per cent in 2024, with a modest uptick to 3.2 per cent in 2025.
This projection, while slightly improved from the October 2023 report by 0.2 percentage points, still falls below the historical average of 3.8 per cent, signalling ongoing challenges to economic recovery.
According to the IMF, advanced economies are expected to experience a slight decline in growth in 2024 before a modest rebound in 2025, driven by factors such as restrictive monetary policies, fiscal support withdrawal, and low productivity growth. In particular, the euro area is forecasted to see growth recover from 2023 lows, supported by stronger household consumption as energy price shocks diminish and inflation eases.
The United States, however, is projected to experience a slowdown in growth from 2023 levels, reflecting the impact of monetary policy tightening, gradual fiscal tightening, and softening labour markets. Despite this, an upward revision for 2024 growth reflects carryover effects from stronger-than-expected outcomes in 2023.
For emerging markets and developing economies, stable growth is anticipated through 2024 and 2025, albeit with regional disparities. World trade growth is projected to remain subdued, reflecting rising trade distortions and geopolitical tensions that continue to hinder global trade levels. The IMF’s forecasts are contingent on assumptions of declining fuel and non-fuel commodity prices, as well as expected interest rate declines in major economies. However, uncertainties persist, including the potential impact of geopolitical events and the evolution of the Covid-19 pandemic.
Dynamics
In Eswatini, these global economic dynamics have implications for policy formulation and economic planning. As a small, open economy, Eswatini is vulnerable to external shocks, including fluctuations in global trade and commodity prices. The country’s policymakers must remain vigilant and adaptable to navigate these challenges effectively.
Furthermore, the IMF’s projections highlight the importance of continued efforts to diversify Eswatini’s economy, enhance productivity, and promote sustainable growth. Initiatives aimed at boosting competitiveness, improving infrastructure, and supporting innovation will be crucial in building resilience and mitigating the impact of external economic headwinds.
Inflation
The update entails that inflation is subsiding faster than expected. Amid favourable global supply developments, inflation has been falling faster than expected, with recent monthly readings near the pre-pandemic average for both headline and underlying (core) inflation. Global headline inflation in the fourth quarter of 2023 is estimated to have been about 0.3 percentage points lower than predicted in the October 2023 WEO on a quarter-over-quarter seasonally adjusted basis. Diminished inflation reflects the fading of relative price shocks notably those to energy prices and their associated passthrough to core inflation.
The decline also reflects an easing in labour market tightness, with a decline in job vacancies, a modest rise in unemployment, and greater labour supply, in some cases associated with a strong inflow of immigrants. Wage growth has generally remained contained, with wage-price spirals in which prices and wages accelerate together and do not take hold. Near-term inflation expectations have fallen in major economies, with long-term expectations remaining anchored.
Borrowing costs
High borrowing costs cooling demand. The World Economic Outlook reports that to reduce inflation, major central banks raised policy interest rates to restrictive levels in 2023, resulting in high mortgage costs, challenges for firms refinancing their debt, tighter credit availability, and weaker business and residential investment. Commercial real estate has been especially under pressure, with higher borrowing costs compounding post-pandemic structural changes.
But with inflation easing, market expectations that future policy rates will decline have contributed to a reduction in longer-term interest rates and rising equity markets. Still, long-term borrowing costs remain high in both advanced and emerging markets and developing economies, partly because government debt has been rising.
In addition, central banks’ policy rate decisions are becoming increasingly asynchronous.
In some countries with falling inflation including Brazil and Chile, where central banks tightened policy earlier than in other countries; interest rates have been declining since the second half of 2023. The central bank has eased monetary policy in China, where inflation has been near zero. The Bank of Japan has kept short-term interest rates near zero.
Fiscal policy amplifying
The update further expresses that fiscal policy is amplifying economic divergences. Governments in advanced economies eased fiscal policy in 2023. The United States, where GDP had already exceeded its prepandemic path, eased policy more than did the euro area and other economies in which the recovery was incomplete.
In emerging markets and developing economies, in which output has on average fallen even further below the prepandemic trend, on average the fiscal stance is estimated to have been neutral.
The exceptions include Brazil and Russia, where fiscal policy eased in 2023. In lowincome countries, liquidity squeezes and the elevated cost of interest payments averaging 13 per cent of general government revenues, about double the level 15 years ago which crowded out necessary investments, hampering the recovery of large output losses compared with pre-pandemic trends. In 2024, the fiscal policy stance is expected to tighten in several advanced and emerging markets and developing economies to rebuild budgetary room for manoeuvre and curb the rising path of debt, and this shift is expected to slow growth in the near term.