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The United States, China and Russia all are set to post stronger growth than initially expected, helping lift the global outlook, the fund said. At the same time, inflation around the world is being brought under control, thanks to a combination of higher interest rates and unsnarled supply chains.
“We are now in the final descent toward a soft landing with inflation declining steadily and growth holding up. But the pace of expansion remains on the slow side and there might be turbulence ahead,” said Pierre-Olivier Gourinchas, the IMF’s chief economist.
The fund is more upbeat than its sister institution, the World Bank, which said earlier this month that it expected the global economy to slow this year on its way to completing its worst half-decade since the early 1990s. The bank anticipates global growth of just 2.4 percent in 2024.
In October, IMF economists feared that the higher interest rates needed to fight inflation might slow economic activity too much and tip the world into a painful recession. But that has not happened.
Growth in the United States and parts of the developing world such as in India and Southeast Asia help explain the improved picture, Gourinchas said.
The United States will expand this year at an annual rate of 2.5 percent, up from the 1.9 percent that the fund predicted three months ago, helped by strong consumption and government spending.
Fund economists also increased their forecast for Russia, saying it will grow this year at an annual 2.6 percent pace, up from the anemic 1.1 percent growth predicted in October. Despite comprehensive U.S. and allied sanctions in response to Russia’s invasion of Ukraine, the Russian economy turned in surprisingly strong growth last year, which is likely to continue.
Problems in China’s debt-fueled property sector also have not been as bad as expected. The fund projects growth of 4.6 percent in China this year, up 0.4 percentage points from the previous forecast.
The global economy seems about as likely to exceed expectations this year as to disappoint, the fund’s economists said.
“The balance of risks … is very different now than it was. … Some of those really bad risks that we were worried about have not materialized,” said Petya Koeva Brooks, deputy director of the IMF’s research department.
Still, officials urged countries to start repairing their finances after several years of heavy borrowing to fight the coronavirus pandemic and pay inflated bills for food, fuel and fertilizer. Higher interest rates have increased annual debt repayment costs for most countries, particularly in the developing world.
“That is the next very important thing in front of us, because we are concerned about the fragilities on the fiscal side,” Gourinchas said.
Fund officials also are keeping an eye on the Middle East, where conflicts in Gaza and the Red Sea could spark a wider war. Already, attacks on cargo vessels in the Red Sea by Houthi rebels in Yemen have caused a sharp increase in shipping costs.
For now, “the broader economic impact remains limited,” said Gourinchas.
Amid persistent tensions between the United States and China, fund officials remain concerned that the global economy may split into rival blocs. Nations imposed about 3,200 new restrictions on trade in 2022 and an additional 3,000 last year, the IMF said. In 2019, by contrast, new trade measures totaled just 1,100.
“Trade measures have exploded around the world,” said Gourinchas. “And that’s certainly something that has an economic cost that can weigh down on global growth.”
The IMF also cautioned against the growing use of industrial policies to shape economic outcomes.
The Biden administration has been among the most active nations in implementing such government incentives, according to Global Trade Alert, a private group. The administration is investing in new roads, bridges and ports while subsidizing production of semiconductors and clean energy projects.
Such policies must be consistent with World Trade Organization requirements, the IMF said. And some of Biden’s “Buy America” provisions may not be.
“We are concerned that some of these measures may, in fact, not be fully WTO compliant. Some measures in particular that include a local content requirement would seem not to be compliant with WTO rules,” Gourinchas said.
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