MNI: IMF Sees Global Soft Landing, Central Bank Caution Needed

The global economy appears headed for a soft landing as inflation slows and economic growth stabilizes after a few bumpy years, and central banks face two-sided risks as they decide whether to begin loosening policy, the IMF said Tuesday.

"The clouds are beginning to part. The global economy begins the final descent toward a soft landing, with inflation declining steadily and growth holding up. But the pace of expansion remains slow, and turbulence may lie ahead," IMF research director Pierre-Olivier Gourinchas wrote in a blog post.

The Washington-based fund's updated World Economic Outlook raised the global growth forecast to 3.1% from 2.9% and said growth next year will be 3.2%. While lagging the historical average of 3.8%, the report is upbeat after prior focus on downside risks from the pandemic and the Ukraine war. Inflation also has a better outlook with the IMF lowering its global call by 0.4pp to 4.9% this year-- excluding Argentina.

"Central banks now face two-sided risks," Gourinchas wrote. "They must avoid premature easing that would undo many hard-earned credibility gains and lead to a rebound in inflation," he said. "It will be equally important to pivot toward monetary normalization in time, as several emerging markets where inflation is well on the way down have started doing already."

The Fed must focus more on the risk of moving too early, he said. "The euro area, where the surge in energy prices has played a disproportionate role, needs to manage more the second risk," he said. (See: MNI INTERVIEW: Taylor Rule Supports March Cut -Ex-Fed's Tracy)

Other highlights:

• “The forecast for 2024 is about 0.2 percentage point higher, reflecting upgrades for China, the United States, and large emerging market and developing economies.”
• “In the United States, growth is projected to fall from 2.5% in 2023 to 2.1% in 2024 and 1.7% in 2025, with the lagged effects of monetary policy tightening, gradual fiscal tightening, and a softening in labor markets slowing aggregate demand.”
• “Growth in China is projected at 4.6% in 2024 and 4.1% in 2025, with an upward revision of 0.4 percentage point for 2024 since the October 2023 WEO. The upgrade reflects carryover from stronger-than-expected growth in 2023 and increased government spending.”