IMF fears slower growth lies ahead

Two wars, higher interest rates and the lingering effects of the coronavirus pandemic have done little to slow the global economy, but that may be about to change, according to the International Monetary Fund.

The fund’s new forecast calls for global growth of 3.2% this year and next, virtually unchanged from its January assessment. Central banks in the United States, Europe and key emerging markets are making progress corralling inflation, though the fund warned that the fight against rising prices is not yet won.

While positive, the outlook is cause for only muted celebration.

This year’s anticipated growth falls short of the pre-pandemic annual average of 3.8% and reflects an uneven global picture, with the United States posting a better-than-expected result while Europe languishes and the world’s poorest nations fall further behind.

Rising geopolitical risks, including signs of a global trading system dividing into separate blocs oriented around the United States and China, are also troubling fund officials. If that split widens, nations could suffer “large output losses” as goods and capital move around the world less efficiently, the fund warned in its flagship World Economic Outlook.

The view is darker a few years from now.

Unless policy reforms or new technologies emerge, annual global growth rates will slip over the remainder of this decade, the fund said in a detailed assessment of “medium-term” growth prospects.

By 2030, the global economy could be expanding at an anemic 2.8% annual rate, which the fund called “historically weak.” Slower growth would disappoint expectations of rising living standards and further progress in anti-poverty efforts.

Officials said chronic weakness in the global economy’s performance since the 2008 financial crisis raises concerns that growth will

struggle to accelerate beyond today’s middling pace.

Growth has lagged because of a productivity slump in both advanced and developing economies. The supply of labor has expanded more slowly as societies have aged, while business investment has ebbed, the fund said.

The United States is an exception to the global trend, with its companies proving more adept at deploying workers and capital in more efficient ways, the fund said.

The IMF’s economic forecasts and the global economy’s actual growth rates have steadily ratcheted lower over the past decade and a half.

In a speech last week, Kristalina Georgieva, the fund’s managing director, warned that the global economy is headed for “a sluggish and disappointing decade,” which she dubbed the “Tepid Twenties.”

Still, the current situation is better than what the fund anticipated six months ago. At that point, fund economists worried that the higher interest rates needed to fight inflation would send unemployment soaring.

But that hasn’t happened. If current trends continue as expected, central banks including the Federal Reserve should be in position to begin lowering interest rates later this year.

“Despite many gloomy predictions, the global economy has held steady, and inflation has been returning to target,” said Pierre-Olivier Gourinchas, the fund’s chief economist, who briefed reporters on the outlook.

The report was released on the eve of the annual spring meetings of the IMF and its sister organization, the World Bank. Central bankers and finance ministers from around the world will gather in Washington this week to discuss the inflation outlook, global debt and prospects for reform of financial aid for developing countries.

This year, China is likely to fall short of last year’s 5.2% growth, as a lingering property crisis weighs on the economy, according to the fund. And Russia, having shrugged off U.S. and allied financial sanctions imposed in response to its 2022 invasion of Ukraine, will grow at an annual rate of 3.2%.

That’s faster than the United States, Europe, Britain and Japan.

The fund coupled its praise of the United States, which it says will grow this year at an annual rate of 2.7%, with a warning that its government spending is “out of line with what is needed for long-term fiscal stability.” Last year’s $1.7 trillion U.S. federal budget deficit was up from about $1.4 trillion in fiscal 2022. All that red ink risks adding to inflation and damaging global financial stability in the long run, by raising borrowing costs for governments around the world, the fund said.

Officials repeated their call for governments that spent freely during the pandemic to rebuild their financial cushions to guard against future shocks.