International battle in opposition to inflation “nearly gained”, however dangers are rising: IMF

According to the International Monetary Fund, much of the world has successfully reduced inflation and managed a soft landing for the economy, avoiding recession, but faces rising geopolitical risks and weaker long-term growth prospects.

Global headline inflation will fall to 3.5% a year by the end of 2025 from an average of 5.8% in 2024, the agency said in its World Economic Outlook released on Tuesday. Inflation peaked in the third quarter of 2022 at an annual rate of 9.4%. The rate at the end of 2025 is slightly below the average annual price increase in the two decades before the Covid-19 pandemic.

“The global battle against inflation is almost won,” the IMF report declared, even as it called for a “triple policy pivot” to address interest rates, government spending, and reforms and investments to boost productivity.

“Despite the good news on inflation, downside risks are increasing and now dominate the outlook,” said IMF chief economist Pierre-Olivier Gourinchas. With inflation now moving in the right direction, global policymakers face a new challenge arising from the growth rate of the global economy, the IMF warned.

The fund left its global growth estimate for 2024 and 2025 at 3.2% – which it called “stable but disappointing.” Faster growth is now forecast in the United States, and strong growth is also expected in emerging Asian economies due to robust investment in artificial intelligence. However, the IMF cut its outlook for other advanced economies – particularly the largest European nations – as well as several emerging markets, blaming worsening global conflicts and the resulting risks to commodity prices.

Vigilance is required in the final phase of disinflation

The Washington-based IMF, which has 190 member countries, said in its overview that responsive monetary policy was key to reducing inflation as labor market conditions normalized and supply shocks eased, all helping to prevent a global recession.

Central banks must remain vigilant to fully bring down inflation, the report warned. It added that inflation in the services sector was still almost twice as high as before the pandemic as wages in certain countries continued to keep pace with the rise in the cost of living, causing inflationary pressures to rise in several emerging markets such as Brazil and Mexico increased.

“While inflation expectations are well anchored this time, things could be more difficult next time as workers and businesses will be more vigilant in protecting their living standards and profits in the future,” the report said.

Lower-income countries, where food and energy costs make up a larger share of household spending, are also more sensitive to rising commodity prices, which could lead to higher inflation. Poorer countries are already under greater stress from repaying government debt, which could further limit funding for public programs.

Market volatility is one of the key downside risks

Increased financial volatility is another threat to global growth, the IMF report said. Sudden market sell-offs, such as those that occurred in early August, have been cited by the IMF as a key risk clouding the economic outlook. Although markets have stabilized since the brief dip in August, driven by the unwinding of the yen carry trade and weaker-than-expected U.S. jobs data, concerns remain, according to the fund.

“The return of financial market volatility over the summer has raised old fears about hidden vulnerabilities. This has increased concerns about the appropriate monetary policy stance,” the report said.

In the final stages of the fight against inflation, further challenges could arise for global financial markets. If underlying inflation remains stubborn, market turbulence and contagion effects are a key risk – a crucial risk for low-income countries already stressed by high government debt and volatility in foreign exchange markets.

Other downside risks include geopolitical concerns, particularly the Middle East conflict, and potential increases in commodity prices. A potentially sharper decline in China's real estate market, interest rates that have been too high for too long and increasing protectionism in global trade are other threats to prosperity, the IMF said.

The prospects are bleaker in the longer term. The IMF forecasts global growth will rise 3.1% annually in the late 2020s, the lowest level in decades. While China's weaker outlook has weighed on medium-term forecasts, the outlook in Latin America and Europe is also worsening. Structural headwinds such as low productivity and aging populations also limit growth prospects.

“Predicted slowdowns in the largest emerging and developing economies imply a longer path to closing income gaps between rich and poor countries. Stagnant growth could also further exacerbate income inequality within economies,” the IMF warned.