Shivanand Pandit
The International Monetary Fund’s (IMF) October 2024 release of its World Economic Outlook (WEO) has just arrived, but the contents are not as cheerful and encouraging as anticipated. The viewpoint of the IMF predicts global growth to stay steady yet disappointing at 3.2% for both 2024 and 2025. The IMF has lowered its 2025 growth forecast by ten basis points to 3.2% compared to its July update. While the growth outlook for the U.S. has been modified upward for both 2024 and 2025, the forecast for the euro area has been downgraded. Even more concerning is the IMF’s medium-term projection, indicating that the economic slowdown will likely linger like an unwelcome guest.On the bright side, the outlook reveals that, at least in the short term, a much-feared global recession has been averted, inflation is close to being tamed, and economic growth remains steady.
The IMF has maintained its GDP growth forecast for India at 7% for the fiscal year 2024-25, followed by a slight moderation to 6.5% in the subsequent year. This anticipated slowdown is attributed to the depletion of “pent-up demand” that had built up during the pandemic. Evidence of this trend is already observable in sectors like automotive sales and consumer non-durables, where urban demand appears to be faltering.According to a Reserve Bank of India index, the GDP growth rate for the second quarter is projected at 6.8%, a marginal increase from the 6.7% recorded in the first quarter. While favourable monsoon conditions and rising rural incomes have the potential to bolster economic performance in the upcoming months, this improvement cannot be taken for granted.
A more concerning aspect of the current economic landscape is the IMF’s prediction that global growth will only reach a modest 3.1% over the next five years. This growth rate falls short when compared to pre-COVID trends and is further compounded by an increase in protectionist industrial and trade policies worldwide. As a result, India’s economic performance is likely to become increasingly dependent on domestic factors. However, challenges such as weaker export performance and declining foreign investment flows could hinder overall growth.In light of these developments, the Indian government has acknowledged the need to focus its reform agenda more intensively at the state level. While this is an important realization, it is equally essential for central policymakers to intensify their efforts to enhance potential growth across the economy.Suggestions from the World Bank include making India a more open economy by reducing import tariffs and foreign direct investment (FDI) barriers. Additionally, the IMF has emphasized the necessity for ambitious domestic reforms aimed at improving competition, fostering economic integration, and stimulating private investment. While India is poised for steady growth, a range of domestic and global factors must be addressed to ensure sustainable economic development in the coming years.
Indeed, the world is moving through a slow, elegant chaos, leaving us uncertain about what might unfold next.
After a tolerably turbulent 2023, marked by high inflation and rising interest rates, there were signs of economic recovery, with inflation easing and the anticipation of rate cuts. However, the latest revelations from the WEO have dampened these hopes, reminding us that doubt continues to shape global growth. One main downside risk, unexpectedly, comes from central banks’ “Great Tightening” phase. As inflation soared, central banks took centre stage, wielding their power like the masters of the financial universe. However, the IMF has warned that keeping monetary policy tight for too long could lead to unintended consequences.
Beyond high interest rates, several other factors could hinder global growth. They are escalating geopolitical tensions and regional conflicts, potential spikes in financial market volatility that could destabilize sovereign debt markets, a sharper slowdown in China, rising protectionism, renewed surges in commodity prices, and worsening debt crises in emerging markets and developing economies. Moreover, persistent structural challenges – such as ageing populations and sluggish productivity – are limiting potential growth in many countries. Adding to this uncertainty is the political landscape, with 64 nations representing half of the world’s population, facing elections or newly elected governments in 2024.
In its global growth forecast, the IMF projects a five-year outlook that is upsetting compared to pre-pandemic averages. For many nations, the five-year prediction appears weaker than the one-year prediction, indicating a prolonged struggle to close the income gap between poorer and wealthier countries. Persistently low growth could further deepen income inequality within nations, as extended periods of slow economic growthlasting four years or moreoften lead to sluggish job creation and stagnant wages. However, the IMF warns that the world economy faces significant uncertainties that could persist until at least 2029, and this caution should not be overlooked.
In advancing markets and developing economies, the growth outlook is relatively stable, with projections of around 4.2% for the next two years, settling at 3.9% by 2026. However, growth in emerging Asia is expected to decline from 5.7% in 2023 to 5% by 2025, primarily due to developments in India and China.India’s GDP growth forecast remains consistent, anticipated to moderate from 8.2% in 2023 to 7% in 2024 and then to 6.5% in 2025. Meanwhile, in China, despite persistent challenges in the real estate sector and low consumer confidence, growth is projected to slow only slightly to 4.8% in 2024, supported by stronger-than-expected net exports. Consequently, the growth forecast for China has been adjusted upward by 0.2 percentage points for 2024 and by 0.4 percentage points for 2025.
The IMF assigns the latest surge in inflation to supply chain disturbances, robust post-pandemic demand, and elevated commodity prices linked to the Ukraine war. An important discovery from the WEO is that enduring disinflation is mainly driven by the unwinding of these shocks and improvements in labour supply, rather than solely from interest rate hikes. Central banks have played a significant role in anchoring inflation expectations, helping to avert damaging wage-price spirals.
After peaking at 9.4% in Q3 2022, headline inflation rates are projected to decline to 3.5% by the end of 2025, slightly below the 3.6% average recorded between 2000 and 2019. Global headline inflation is anticipated to fall from an average of 6.7% in 2023 to 5.8% in 2024, and further to 4.3% in 2025. Advanced economies are expected to reach their inflation targets sooner than emerging markets. Despite the ongoing global disinflation, challenges remain, particularly due to potential spikes in commodity prices driven by geopolitical tensions, which could disrupt this progress. Such disruptions may hinder central banks’ ability to ease monetary policy, creating significant challenges for fiscal policy and financial stability.
In the first half of 2023, most central banks paused increases in nominal policy rates, although real policy rates continued to rise as inflation expectations declined, tightening overall monetary policy. Presently, real policy rates are above natural rates, leading to higher mortgage and lending rates. As inflation moves closer to central bank targets, there is an opportunity for a necessary policy shift, that may include easing monetary policy, fiscal consolidation, and structural reforms.
The writer is a tax specialist, financial adviser, author, guest faculty and public speaker based in Goa. He can be reached at [email protected] or 9822983420
