IMF Outlook – World output to grow at 2.8% in calendar 2024 and 2025

28 Oct 2024 , 12:20 PM

WHAT THE IMF WEO SAID ABOUT GLOBAL GROWTH

The International Monetary Fund (IMF) presents its semi-annual World Economic Outlook in April and October each year. In addition, these projections also get updated in July and in January each year, giving an idea of how the projections are changing vis-à-vis the original projection. Broadly, the calendar year 2022 was a solid year across the board. That was hardly surprising as the bounced was from the post-pandemic lows. However, the growth has moderated globally in the year 2023 and it is likely to face further pressure in 2024 and 2025. The table below captures the IMF real GDP growth projections for key global economies as well as the change over the July 2024 updated to these projections.

	REAL GDP GROWTH (%)			CHANGE OVER JULY
Particulars	CY2023	CY2024	CY2025	2024	2025
World Output	3.3	3.2	3.2	0.0	-0.1
Advanced Economies	1.7	1.8	1.8	0.1	0.0
United States (US)	2.9	2.8	2.2	0.2	0.3
Euro Area	0.4	0.8	1.2	-0.1	-0.3
Japan	1.7	0.3	1.1	-0.4	0.1
United Kingdom (UK)	0.3	1.1	1.5	0.4	0.0
Canada	1.2	1.3	2.4	0.0	0.0
Other Advanced Economies	1.8	2.1	2.2	0.1	0.0
Emerging & Developing Markets	4.4	4.2	4.2	0.0	-0.1
China	5.2	4.8	4.5	-0.2	0.0
India	8.2	7.0	6.5	0.0	0.0
Russia	3.6	3.6	1.3	0.4	-0.2
Brazil	2.9	3.0	2.2	0.9	-0.2
Mexico	3.2	1.5	1.3	-0.7	-0.3
Saudi Arabia	-0.8	1.5	4.6	-0.2	-0.1
Nigeria	2.9	2.9	3.2	-0.2	0.2
South Africa	0.7	1.1	1.5	0.2	0.3

Data Source: IMF World Economic Outlook (WEO)

What are the key takeaways from the IMF World Economic Output (WEO) report?

• The world’s largest economy has seen an upgrade in recent months, despite fears of hard landing triggered by the US unemployment numbers at 4.3%. For the US, the 2024 real GDP growth projection has been revised upwards to 2.8%. In July, the projection was at 2.6%. This growth is likely to be triggered by consumption and non-residential investments. The sharp increase in real wages has resulted in spike in consumption.
• Let us turn to the Euro Zone. The EU region grew at a multi-year low of just 0.4% in 2023. This is weaker than the previous projection too. Even in the EU region, rising consumption is an outcome of higher real wages amidst a gradual loosening of monetary policy. However, manufacturing weakness in large economies like Germany and Italy is for a real.
• Offsetting dynamics are also at play among other developed economies like Japan and the UK. In 2024, the Japanese growth is expected to weaken due to supply disruptions and the normalization of the tourism boom. The auto industry disruption is also likely to hit Japan. In the UK, GDP growth is expected to have shown positive growth rate amidst falling inflation and rate cuts stimulating demand.
• In contrast, the IMF report expects that the two big drivers of Asia growth (China and India) are likely to see growth plateau in the coming quarters. Of course, it is expected that India would still do better than China, which is struggling with its prolonged real estate crisis. Emerging Asia, comprising of India and China, is likely to see growth fall from 5.4% in calendar 2023 to 5.4% in 2024 to 5.0% in calendar 2025. The fall in real GDP growth is likely to be more pronounced in India; where the real GDP growth is expected to fall from 8.2% in 2023 to 7.0% in 2024 and further to 6.5% in 2025.
• The RBI estimates 2024 GDP growth at closer to 7.2%; but the slowdown is there. This is largely because the pent-up demand that had accumulated during the pandemic has now been exhausted. In the case of China, the slowdown is likely to be more gradual, notwithstanding the weakness in the real estate sector and low consumer confidence. For the full year 2024, the real GDP growth is growth is projected to have slowed from 5.4% to 4.5%, but it is expected to bounce back to 4.7% in calendar year 2025 on positive build-up in net exports.
• Among the key emerging markets in Latin America, Brazil (a key member of the BRICS) is expected to bounce from 2.2% in 2023 to 3.5% in 2024, although the growth is likely to fall back to the 2023 levels in 2025 too. The upwards revision in 2024 is largely on the back of stronger private consumption and investment in the first half of the year from a tight labour market, government transfers, and limited disruptions from floods. The monetary policy in Brazil is still restrictive and that is likely to dampen growth in 2025. Let us turn to Mexico. Here, the GDP growth is expected to taper from 2.3% in 2023 to 1.3% in 2024 and marginally higher at 1.4% in 2025. Among the emerging African nations, Nigeria is one country that is likely to maintain 3.5% average growth between the calendar years 2023 and 2025.
• Let us finally turn to the two key European emerging economies viz. Russia and Türkiye. In the case of Russia, the growth is likely to taper from 3.6% in 2023 to 3.2% in 2024 and further to 2.2% in 2025. Amidst the sanctions and the prolonged war with Ukraine, Russia is facing a slowdown in consumption and investments. Wage growth has also been slower in Russia as supply now exceeds the demand for labour. Regarding Türkiye, which grew at a healthy 5.1% in 2023, it is expected to slow to 2.7% in 2025. Türkiye has been tightening its fiscal and monetary policy stance; and that is likely to take a toll on its real GDP growth.

To sum up the story of the IMF WEO outlook, there are genuine risks to global growth in the next couple of years.

INFLATION REMAINS THE JOKER IN THE PACK

Since 2022, the big challenge for the global economy has been rampant inflation. Runaway inflation since late 2021 was a mix of two factors. On the one hand, there was a sharp recovery in demand post the pandemic as governments across the world poured billions of helicopter money into public wallets. That was the demand pull side of the story. But the more pernicious impact was from the supply side. Supply chains, which were badly hit by the pandemic, took much longer to recover and get back to normalcy. That interim period led to steep inflation globally. It only started to taper after central banks across the world adopted an extremely hawkish policy to bring down inflation. Let us now turn to the inflation outlook given by the IMF WEO, October 2024.

The fall in inflation across advanced and development markets has been palpable in the last few years. However, the last mile has been tough (as it was expected to be). Hence, while inflation is expected to fall further, the progress would be gradual and spasmodic. In fact, global headline inflation is projected to fall from 6.7% in 2023 to 5.8% in 2024 and further to 4.3% in 2025. However, there would still be a dichotomy as the process of disinflation is expected to be faster in advanced economies. For instance, the average inflation in advanced economies is expected to fall from 4% to 2% in 2024 and remain static at 2% in 2025 also. On the other hand, in emerging markets, the inflation overall is expected to fall from 8.1% in 2023 to just 7.9% in 2024 and further to 5.9% in 2025. Even in the case of India, while the inflation has come down; it is still very vulnerable to food inflation domestically and to the risk of imported inflation amidst the rising geopolitical risks.

However, we have to calibrate our understanding of emerging markets. For instance, Asia is likely to see inflation tapering at par with the advanced economies, but the same cannot be said about emerging markets in Africa or Latin America. Inflation in emerging Asia is projected at 2.1% in 2024 (at par with advanced economies); but rising to 2.7% in 2025. On the other hand, the inflation forecast for Middle East, Africa and Eastern Europe is likely to be in double digits. In the kay Latin American economies of Brazil and Mexico; robust wage growth is preventing quicker disinflation in the services sector.

But the real good news on the inflation outlook lies in the triggers for falling inflation. For instance, if 2023 fall in inflation was driven by lower fuel prices, the fall in inflation in 2024 and 2025 is likely to be triggered by lower core inflation. This is a positive factor since the core inflation is generally known to be a stickier candidate. Most of the advanced and Asian emerging markets are likely to see inflation settling around their target levels by the year 2025 only. Even in the Indian context (according to the IMF report) most of the volatility in inflation has been triggered by food and fuel; while core inflation is now well under the RBI long term target for headline inflation at 4%.

IS THE WORLD ECONOMY MOVING TO A LOW GROWTH REGIME?

That is the million dollar question and the answer is, perhaps, in the affirmative. Like it or not, global economies may have to prepare for lower levels of growth in the coming quarters. In the current context, there is not much scope for structural reforms; which normally boosts GDP growth to a different plane altogether. By 2025, the IMF report expects that most of the economies in the world are likely to return to a neutral monetary policy stance. The 5-year ahead forecast is weaker than the 1-year ahead forecast.

So, what is likely to hold back real GDP growth in the medium term. There are demographic realities like an aging population. At the manufacturing end, the growth in output is likely to be hindered by weak investments and historically low total factor productivity growth. Real GDP growth in the world economy is pegged at 3.1% over the next 5 years, which is clearly showing signs of stress. Among the advanced economies, the US and the UK are likely to sustain above average growth in the coming years while, Japan and the Euro Zone are likely to be under pressure.

According to the IMF World Economic Outlook, “for emerging market and developing economies, medium-term growth prospects have not improved compared with those in April 2024. This is partially reflective of the prolonged scarring from the shocks of the last few years where these EM economies have been a lot more vulnerable. In short, India may have already seen the best of post-pandemic growth in the past 3 years and the only way ahead could be the India growth story normalizing at lower levels!