The International Monetary Fund (IMF) projects global growth to stabilize at 3.3 percent for 2025, reflecting a significant weakening since the pandemic. Inflation is also on a downward trajectory, expected to fall to 4.2 percent this year and 3.5 percent in 2026, aligning with central bank targets. This shift aims to conclude the global disruptions caused by the pandemic and geopolitical events, including Russia’s invasion of Ukraine, which triggered the highest inflation levels in four decades.
Despite the stable global growth forecast, disparities among countries are widening. The United States shows robust economic performance, with an upward revision in growth projections to 2.7 percent for this year, driven by strong domestic demand. In contrast, the euro area is poised for modest growth of just 1 percent, hindered by weak manufacturing and low consumer confidence, alongside ongoing energy price pressures.
Read more: IMF forecasts steady global economic growth, continuing disinflation in 2025
Emerging markets
Emerging market economies are expected to maintain growth rates of 4.2 percent and 4.3 percent for this year and next. However, uncertainty surrounding trade and policy is dampening demand. China is projected to grow by 4.5% next year, an increase from previous forecasts, but faces its own challenges with economic activity.
Divergent trajectories
The divergence in growth trajectories is partly cyclical, with the U.S. economy outperforming its potential while Europe and China lag. However, structural factors contribute to a persistent gap. The U.S. benefits from stronger productivity growth, particularly in technology, a favorable business environment, and deeper capital markets. This leads to higher returns on investment, increased foreign capital inflows, and growing living standards.
Policy uncertainty
The current economic landscape is marked by elevated policy uncertainty, especially following the recent elections in many countries. Risks loom that could exacerbate existing divergences. European economies might slow unexpectedly if public debt sustainability issues arise, while China risks entering a debt-deflation trap if fiscal and monetary measures fall short.
U.S. policy changes
In the U.S., policy changes under the new administration could reignite inflation in the near term. Looser fiscal policies and deregulation may boost demand, while higher tariffs could act as negative supply shocks, according to the IMF. This combination might lead to renewed price pressures, complicating the Federal Reserve’s ability to manage interest rates.
Medium-term vulnerabilities
Medium-term risks include potential fiscal vulnerabilities stemming from recent U.S. policies. While deregulation could spur growth, excessive measures might undermine financial safeguards, increasing the likelihood of economic volatility. Renewed inflationary pressures could de-anchor inflation expectations, requiring agile monetary policy responses, the report highlighted.Â
Challenges for emerging markets
Emerging market economies face additional challenges, including the impact of dollar exchange rates on domestic prices. To stabilize their economies, these countries may need to allow currency depreciation while adjusting monetary policies to maintain price stability, the IMF explained. However, where inflation becomes unanchored or financial stability is at risk, interventions may be necessary.
Need for fiscal reforms
As countries navigate these complexities, timely fiscal reforms are crucial to restore sustainability and build resilience against future shocks. Without prompt action, rising borrowing costs could lead to a detrimental cycle of increased market skepticism and higher adjustment needs, the report noted.
Multilateral cooperation
Ultimately, the IMF emphasizes the importance of multilateral cooperation to foster a resilient global economy. Unilateral trade policies, such as tariffs or subsidies, often distort competition and may harm long-term domestic prospects. Strengthening international economic frameworks is essential for addressing the challenges ahead and promoting sustainable growth.
