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The International Monetary Fund (IMF) on Tuesday upgraded its outlook for the world economy amid signs that inflation is declining faster than expected, but warned that risks remain.
The Washington-based institution said in its latest World Economic Outlook that global gross domestic product will grow by 3.1% this year – which represents a 0.2 percentage point bump from its previous forecast – before rising to 3.2% in 2025.
“The global economy begins the final descent toward a soft landing, with inflation declining steadily and growth holding up,” said Pierre-Olivier Gourinchas, the IMF’s chief economist. “But the pace of expansion remains slow, and turbulence may lie ahead.”
The latest figures suggest the U.S. economy is likely to grow 2.1% this year and 1.7% in 2025.
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Workers deliver packages in Manhattan on Dec. 2, 2022, in New York City. (Photo by Spencer Platt/Getty Images / Getty Images)
Still, Gourinchas cautioned that economic growth remains sluggish in the face of tighter monetary policy – particularly in the U.S. – and that renewed geopolitical tensions in the Middle East and ongoing attacks in the Red Sea pose potential risks to the outlook.
The attacks by the Iran-backed Houthi militants in the Red Sea and Suez Canal, a critical juncture point for world trade, have caused a spike in shipping costs and snarled global trade routes, stoking fears about a resurgence in inflation just as price pressures within the economy finally begin to abate.
Oil prices have climbed since the start of the new year as the U.S. ramps up its response to the attacks.
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About 15% of world shipping traffic, including 30% of global container trade, passes through the Suez Canal. However, to avoid being attacked or having their cargo stolen, many ships are instead sailing around the Cape of Good Hope, which is the long way around the continent of Africa.
A worker grinds a weld on a safe that is being manufactured at Liberty Safe Company on March 22, 2022 in Payson, Utah. (Photo by George Frey/Getty Images / Getty Images)
“New commodity and supply disruptions could occur, following renewed geopolitical tensions, especially in the Middle East,” Gourinchas said. “Shipping costs between Asia and Europe have increased markedly, as Red Sea attacks reroute cargoes around Africa. While disruptions remain limited so far, the situation remains volatile.”
The IMF also warned that core inflation – which excludes food and energy costs – could prove more persistent than anticipated and that markets may be “excessively optimistic” about the prospects for interest rate cuts by central banks around the world.
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In the U.S., investors are betting on aggressive rate cuts by the Federal Reserve, penciling in at least six quarter-point reductions this year. In its latest forecast, the Fed indicated that it could cut rates three times in 2024.
“Should investors re-assess their view, long-term interest rates would increase, putting renewed pressure on governments to implement more rapid fiscal consolidation that could weigh on economic growth,” the IMF said.
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