All things considered, the International Monetary Fund should be feeling relatively upbeat as it hosts its annual meeting in Washington DC this week.
To be sure, its flagship World Economic Outlook (WEO) report shows the global economy stuck in a relatively low-growth pattern. But given how things stood two years ago, when inflation was at its highest for four decades and Russian troops had just invaded Ukraine, it could have been a lot worse.
As the IMF’s economic counsellor, Pierre-Olivier Gourinchas, rightly pointed out, the fight against high inflation is all but over, and the battle has been won without triggering the deep recession some feared when energy prices were soaring in 2022.
While that’s clearly good news, the IMF is aware that there are more downside than upside risks to its forecasts that global growth will be 3.2% in 2024 and 2025. Three main threats are identified.
First, there’s a risk that central banks will be too slow in reducing borrowing costs, leading to slower growth and a reassessment by financial markets of their Goldilocks scenario for the global economy. Markets have bought heavily into the idea that central banks will get policy just right, engineering a return of inflation to targets without a recession. That may be true in the US, it looks less clearcut for the eurozone.
The second risk is that the war in the Middle East escalates and leads to a sharp increase in oil prices. So far, commodity markets have been relaxed about the heightened tension because they see no immediate danger of crude supplies being cut off, but that could rapidly change. Gourinchas said: “An escalation in regional conflicts, especially in the Middle East, could pose serious risks for commodity markets.” It is a warning worth heeding.
Finally, there’s the elephant in the room – the possibility that Donald Trump will return to the White House after next month’s US presidential election. While not mentioning the former president by name, the IMF estimates that a shift towards “undesirable” industrial and trade policies could reduce global GDP by 0.5 percentage points in 2026.
As far as the IMF is concerned, imposing trade barriers and subsidising domestic industry provides a sugar rush but the measures often lead to retaliation and fail to improve living standards in the longer term.
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Trump is unlikely to take any notice of the IMF’s concerns and has floated the idea of 20% tariffs on all imports into the US and a 60% levy on Chinese goods. If he wins in November, the IMF’s next WEO, in April 2025, will make interesting – and perhaps alarming – reading.