Clouds over global economy ‘beginning to part’ but Red Sea crisis could spell trouble, says IMF

London (CNN) — The outlook for the global economy is brightening, the International Monetary Fund said Tuesday as it upgraded its growth forecast for 2024.

But it warned that the “surprisingly resilient” recovery from the pandemic, Russia’s war in Ukraine and the ensuing cost-of-living crisis could be jeopardised by attacks on container ships in the Red Sea, which risked scrambling supply chains and causing a spike in commodity prices. Inflation wasn’t beaten yet, it added.

In its latest World Economic Outlook, the IMF said that it expects the world’s economy to match last year’s growth of 3.1% in 2024 — 0.2 percentage points more than it predicted in October. It expects global growth in gross domestic product — a key measure of economic activity — to pick up slightly to 3.2% next year.

“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,” IMF chief economist Pierre-Olivier Gourinchas wrote in a blog accompanying the report. “But the pace of expansion remains slow, and turbulence may lie ahead.”

The upward revision was driven by stronger-than-expected economic growth in the United States during the latter half of 2023, the IMF said, as well as robust growth in several emerging and developing economies. India, for example, is forecast to expand 6.5% this year and next, putting it far out in front of other major economies.

The IMF also upgraded its 2024 view on China’s economy. It now sees growth of 4.6% this year, 0.4 percentage points up on its October forecast, owing partly to a better-than-expected performance in 2023 as well as increases in government spending.

The world’s second-biggest economy has grappled with a cocktail of challenges in recent years, including an ongoing crisis in real estate and high youth unemployment. China’s economy grew 5.2% in 2023, beating government projections, but that still amounted to one of the country’s worst growth numbers in the past three decades.

Despite the IMF’s upgrades, its projections for global growth for 2024 and 2025 are below the annual average of 3.8% clocked up over the first two decades of this century. That reflects, in part, the impact of high interest rates, the fund said.

Higher official borrowing costs push up the cost of capital, which tends to dampen borrowing by households and businesses, reining in overall spending in the economy.

Economists and investors have been hoping for a so-called “soft landing” — that is, a successful attempt by central banks to cool inflation without tipping their economies into recession.

Inflation and the Red Sea crisis

Global inflation is expected to average 5.8% this year, down from an estimated 6.8% in 2023, according to the IMF, reflecting a pullback in energy prices and a loosening of labor markets.

Although inflation is entering its “final descent,” recent disruptions to the flow of global trade through the Red Sea have raised the risk of price spikes for certain commodities, the IMF said.

Iran-backed Houthi rebels have ratcheted up attacks on ships in the Red Sea — a vital trading route — in retaliation for Israel’s war against Hamas. As a result, several major container shipping companies have diverted their vessels away from the waterway, and some oil tankers have also been forced to take longer routes. The longer and costlier journeys have raised fears of a renewed rise in global inflation.

“Continued attacks in the Red Sea — through which 11% of global trade flows — and the ongoing war in Ukraine risk generating fresh adverse supply shocks to the global recovery, with spikes in food, energy, and transportation costs,” the IMF said Tuesday.

A spillover of the Israel-Hamas war into a wider conflict in the Middle East would threaten global growth, the fund added. The region accounts for about 35% and 14% of the world’s oil and gas exports respectively.

For now, though, a rise in shipping costs since the escalation of the attacks in the Red Sea is not having a “major macroeconomic impact,” Gourinchas told journalists Tuesday.

“As of now, the impact that we see on inflation in, let’s say, European economies, is fairly modest,” he said. “Even though the increase in shipping costs is substantial, this hasn’t really translated into an overall increase, of a sizable nature, in inflation.”

The IMF also warned that core inflation could still prove problematic, particularly if the cost of services keeps rising and upward pressure on wages persists. Indebted governments could be forced to cut spending or raise taxes, if financial markets become less convinced that interest rate cuts are imminent.

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