The global war against inflation has largely been won — and at surprisingly little cost to economic growth, the International Monetary Fund has declared.
In its latest assessment of the global economy, the IMF predicted that worldwide inflation will cool from 6.7 per cent last year to 5.8 per cent this year and to 4.3 per cent in 2025. It estimates that inflation will fall even faster in the world's wealthy countries, from 4.6 per cent last year to 2.6 per cent this year and 2 per cent — the target range for most major central banks — in 2025.
The slowdown in inflation, after years of crushing price increases in the aftermath of the pandemic, led the US Federal Reserve and the European Central Bank to cut interest rates this year after they had aggressively raised them to try to tame inflation.
"The battle against inflation is almost won," Pierre-Olivier Gourinchas, the IMF's chief economist, told reporters on Tuesday. "In most countries, inflation is hovering close to central bank targets."
Inflation had accelerated when the world economy recovered with unexpected speed from the COVID-19 recession, leaving factories, freight yards, ports and businesses overwhelmed with customer orders and creating shortages, delays and higher prices.
The high borrowing rates engineered by major central banks, along with the end of supply chain logjams, brought inflation dramatically down from the four-decade highs it hit in mid-2022.
And to the surprise of forecasters, the economy — especially the largest, in the United States — continued to grow and employers kept hiring despite higher borrowing costs.
"The decline in inflation without a global recession is a major achievement," Gourinchas wrote in a blog post that accompanied the IMF's latest World Economic Outlook.
The IMF, a 190-nation lending organisation, works to promote economic growth and financial stability and reduce global poverty.
It expects the US economy to expand 2.8 per cent this year, down slightly from 2.9 per cent in 2023 but an improvement on the 2.6 per cent it had forecast in July. Growth in the United States has been led by strong consumer spending, fuelled by healthy gains in inflation-adjusted wages.
Next year, though, the IMF expects the US economy to decelerate to 2.2 per cent growth. With a new presidential administration and Congress in place, the IMF envisions the nation's job market losing some momentum in 2025 as the government begins seeking to curb huge budget deficits.
The IMF expects China's economic growth to slow from 5.2 per cent last year to 4.8 per cent this year and 4.5 per cent in 2025. The world's No. 2 economy has been hobbled by a collapse in its housing market and by weak consumer confidence — problems only partly offset by strong exports.
The overall world economy is expected to grow 3.2 per cent in both 2024 and 2025, down a tick from 3.3 per cent last year. That's an unimpressive standard: From 2000 through 2019, before the pandemic upended economic activity, global growth had averaged 3.8 per cent a year.
The IMF also continues to express concern that geopolitical tension, including antagonism between the United States and China, could make world trade less efficient.
The concern is that more countries would increasingly do business with their allies instead of seeking the lowest-priced or best-made foreign goods. Still, global trade, measured by volume, is expected to grow 3.1 per cent this year and 3.4 per cent in 2025, improving on 2023's anemic 0.8 per cent increase.
Gourinchas also suggested that economic growth could end up being weaker than expected if countries take steps to reduce immigration, which has helped ease labour shortages in the United States and other advanced economies. And he said armed conflicts, like those in Ukraine and the Middle East, could also threaten the economic outlook.