IMF spring meeting take-aways: short-term resilience, but no reacceleration in the mid term

• The IMF outlook highlights the remarkable resilience in growth and declining inflation in most countries. However, the medium-term outlook remains subdued when compared to the pre-pandemic growth average.
   
• Although inflation is softening, its reduction remains a priority and central banks need to calibrate monetary policy at a country level.
   
• The tremendous optimism in financial markets based on the soft-landing narrative presents challenges: inflation persistence, compressed volatility and high correlation across assets with elevated fundamental uncertainty.

In recent months, the IMF and other economic forecasters have raised their growth projections for 2024. The April World Economic Outlook showed revisions (+0.3% Global) that primarily affected the US, China and Emerging Markets (EM). These revisions were based on expectations of less economic scarring from the recent crisis, insufficient fiscal adjustment supporting short-term growth and less effective monetary policy transmission compared to the past.

To further support economic performance, many countries have reintroduced industrial policies, driven by both economic and non-economic factors. Moreover, the IMF advocates the use of fiscal measures when necessary. These measures aim to enhance competitiveness, address climate change, strengthen supply chain resilience and bolster national security. The main sectors targeted are advanced technology, military/civil dual-use industries, low-carbon technology, steel and aluminium.

Since October 2023, the short-term risk of recession (with global growth at 2.0%) has decreased from 15% to 10%. While the various risks to the baseline scenario are generally balanced, it is worth noting that EM appear to be in a relatively better position than advanced economies. The only exception to that relates to the risk of deflation in China, due to the larger global economic slack and China’s excess capacity in the goods sector.

 
An important exception to this remarkable resilience can be observed in low-income countries where the effects of the recent crisis still persist. Growth projections for these countries have been revised downward, while inflation has increased. Inequality is increasing not only within countries but even among countries. The Common Framework for debt restructuring remains largely absent and market access is very limited.

Meanwhile, the IMF’s lending efforts are progressing in large Frontier countries such as Argentina, Egypt and Pakistan. However, the IMF needs to refine its lending toolkit and improve its effectiveness, while also considering a more robust approach to prevent a long list of serial users. The current global macro environment presents challenges for maintaining IMF programmes, as financial conditions have tightened and geopolitical volatility is affecting risk premiums.

Although the medium-term outlook still appears decent, global GDP growth is projected to oscillate between 3.1% and 3.2% until 2029. This highlights a lack of significant economic acceleration compared to the prepandemic average growth of 3.8%. The main culprit for this sluggishness is the decline in total-factor productivity (TFP) caused by the misallocation of resources, with the exception of the US (US Exceptionalism).
Additionally, the current reliance on fiscal stimulus may become a future concern if the necessary buffers are not adequately replenished. It is important to note that the potential positive impact of Artificial Intelligence on the economy, which is not accounted for in the IMF’s baseline projections, could act as an upside risk. While the dichotomy between technological progress and labour displacement should affect advanced economies more in the short run, EM are likely to reap fewer benefits in the medium term.

Inflation is expected to continue to moderate, although the final stage of disinflation may prove more challenging due to factors such as persistent services inflation and tight labour markets. Central banks are therefore encouraged to remain vigilant and patient. This implies that monetary policies should be implemented asynchronously among both Advanced and Emerging economies. The Fed should be more patient and not market-driven, while the ECB may act more quickly. EM central banks should continue with their easing cycle, in most cases starting from a position of tight conditions, in order to tackle inflation on both domestic and import fronts. However, each CB should take into account the Fed’s patient approach when determining its own monetary policy stance.