Recent data sparks hope for a potential “touchdown” of inflation, according to the International Monetary Fund (IMF) in their latest update to the World Economic Outlook. Pierre-Olivier Gourinchas, the IMF’s chief economist, acknowledges this positive development in a blog accompanying the report, stating that stronger growth and lower inflation than anticipated suggest that the global economy is on the right track. However, he also emphasizes that challenges still loom on the horizon, urging caution and discouraging premature celebration.
The IMF has made slight adjustments to their formal outlook. According to their baseline forecast, the global economy is expected to decelerate from last year’s 3.5% rate to a 3% rate this year and the next. Growth for this year has been revised up by 0.2 percentage points. Among the advanced economies, both the euro zone and the United Kingdom exhibit relatively weak performance.
In terms of inflation, global projections indicate a decline from last year’s 8.7% rate to a 6.8% rate this year, which is 0.2 percentage points lower than anticipated. Furthermore, inflation is forecasted to continue its downward trend, reaching a 5.2% rate by 2024.
Although these developments are encouraging, it is important to consider the risks that may hinder progress in the global economy. As history has shown, there is a higher likelihood of stumbling and disappointment rather than positive surprises.
Therefore, it is crucial to exercise caution and remain vigilant in assessing the state of the global economy. While there is reason for optimism, it is important not to prematurely celebrate the potential end of the current inflationary cycle.
Signs of Global Economic Slowdown
Signs are emerging that global economic activity is losing steam, with the rapid increase in interest rates taking its toll.
Economic Challenges in the U.S.
The International Monetary Fund (IMF) has stated that excess savings in the United States have been nearly depleted. This indicates a potential slowdown in the American economy.
Concerns in China
China, one of the world’s largest economies, is also witnessing signs of weakening growth. Persistent concerns about the property sector are contributing to this trend.
Stubborn Core Inflation
Core inflation, which excludes food and energy prices, remains stubbornly high in developed economies. The IMF predicts that it will remain unchanged at 5.1% in 2023 compared to the previous year. However, it is expected to gradually decline to a rate of 3.1% next year.
The Battle Against Inflation
Despite efforts to control inflation, the IMF cautions that the fight is far from over. Gourinchas, an expert from the IMF, suggests that labor market developments and wage-profit dynamics will play a crucial role in determining the persistence of inflation.
The Role of Wage Inflation
Contrary to popular belief, Gourinchas argues that “greedflation” is not the main culprit for rising prices. Instead, he explains that wages have lagged behind inflation rates because prices tend to rise more quickly than wages when there is excessive demand.
Optimism for Higher Wages
Gourinchas remains positive and believes that there is room for higher wages without triggering further price increases. This concept is known as a wage-price spiral, and it offers hope for maintaining economic stability without exacerbating inflation.