"The clouds are beginning to part," said Pierre-Olivier Gourinchas, economic counselor and director of research at the IMF, in the blog dated Jan. 30. "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."
World growth was 3.1% in 2023, with activity proving to be resilient in the last six months of the year, the IMF said.
Resilience will carry over, Gourinchas said, but "important divergences" among regions will remain.
U.S. growth was revised upward to 2.1% for 2024, from the previous projection of 1.5%, but falling to 1.7% in 2025. The IMF said tight monetary policy will continue working through the U.S. economy this year.
Weaker consumption and investment will continue to weigh on China, although growth forecasts were revised upward to 4.6% for 2024 from 4.2%, before falling to 4.1% in 2025.
The eurozone is set to rebound from 0.5% growth in 2023, with a 0.9% projection for 2024. That compared with a 1.2% projection made in October. Growth for 2025 is expected to be 1.7%.
Elsewhere, the IMF revised Japan growth slightly downward, to 0.9% from 1%; and emerging markets upward to 4.1% from 4%. U.K. growth was unchanged at 0.6%.
Upside risks include faster disinflation than anticipated and delayed fiscal consolidation measures as countries face rising calls for increased public spending in "the biggest global election year in history." Elections could boost economic activity but "spur inflation and increase the prospect of disruption later."
Rapid improvements in artificial intelligence could also boost investment and spur rapid productivity growth, although it would also present challenges for workers, the IMF said.
Downside risks include new commodity and supply disruptions following renewed geopolitical tensions — particularly in the Middle East; more persistent core inflation; and the fact that markets "appear excessively optimistic about the prospects for early rate cuts. 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," Gourinchas said.
The blog also highlighted central bank moves, adding that actions have worked in two ways. First, the "rapid pace of tightening helped convince people and companies that high inflation would not be allowed to take hold. This prevented inflation expectations from persistently rising, helped dampen wage growth, and reduced the risk of a wage-price spiral. Second, the unusually synchronized nature of the tightening lowered world energy demand, directly reducing headline inflation," Gourinchas said.
However, uncertainties remain, and there are now two-sided risks for central banks: "They must avoid premature easing that would undo many hard-earned credibility gains and lead to a rebound in inflation. But signs of strain are growing in interest rate-sensitive sectors, such as construction, and loan activity has declined markedly. 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 so already. Not doing so would jeopardize growth and risk inflation falling below target," he wrote.
The U.S., he said, needs to focus on risks in the first category of avoiding rebounding inflation. The eurozone instead should look at the second risk since energy prices have played a "disproportionate role" in the economy. "In both cases, staying on the path toward a soft landing may not be easy," Gourinchas warned.