Global growth steady amid slowing disinflation, policy uncertainties

The global economy is set for modest growth over the next two years amid cooling activity in the US, a bottoming-out in Europe and stronger consumption and exports for China, but risks to the path abound, according to the International Monetary Fund (IMF).Global growth projections are unchanged at 3.2% this year and slightly higher at 3.3% for next year, but there have been notable developments beneath the surface since the World Economic Outlook in April, the fund noted.Growth in major advanced economies is becoming more aligned as output gaps are closing, IMF said in its recent World Economic Outlook.The United States shows increasing signs of cooling, especially in the labour market, after a strong 2023. The euro area, meanwhile, is poised to pick up after a nearly flat performance last year.Asia’s emerging market economies remain the main engine for the global economy. Growth in India and China is revised upwards and accounts for almost half of global growth.Yet, prospects for the next five years remain weak, largely because of waning momentum in emerging Asia. By 2029, growth in China is projected to moderate to 3.3%, well below its current pace.As in April, IMF has projected that global inflation will slow to 5.9% this year from 6.7% last year, broadly on track for a soft landing.But in some advanced economies, especially the United States, progress on disinflation has slowed, and risks are to the upside.In its latest WEO update, IMF finds that risks remain broadly balanced, but two downside near-term risks have become more prominent.First, further challenges to disinflation in advanced economies could force central banks, including the Federal Reserve, to keep borrowing costs higher for even longer.That would put overall growth at risk, with increased upward pressure on the dollar and harmful spillovers to emerging and developing economies.Mounting empirical evidence, including some of our own, points to the importance of global ‘headline’ inflation shocks — mostly energy and food prices — in driving the inflation surge and subsequent decline across a broad range of countries.The good news is that, as headline shocks receded, inflation came down without a recession. The bad news is that energy and food price inflation are now almost back to pre-pandemic levels in many countries, while overall inflation is not."Growth in major advanced economies is becoming more aligned as output gaps are closing,” IMF chief economist Pierre-Olivier Gourinchas said in a blog post accompanying the report, adding that the US was showing increasing signs of cooling, while Europe was poised to pick up.The IMF significantly hiked its China growth forecast to 5% — matching the Chinese government’s target for the year — from 4.6% in April due to a first-quarter rebound in private consumption and strong exports.The IMF also boosted its 2025 China growth forecast to 4.5% from 4.1% in April.Gourinchas told Reuters that the new data poses a downside risk to the IMF forecast, as it signals weakness in consumer confidence and continuing problems in the country’s property sector.