Soft landing: From pandemic to war, the global economy faces several risks

The latest World Economic Outlook (WEO) of the International Monetary Fund (IMF), released on Tuesday, shows global economic prospects remain stable. The IMF has retained its global growth projection of 3.2 per cent for 2024. Compared to its July update, it has reduced the projection for 2025 by 10 basis points to 3.2 per cent. The growth projection for the US has been lifted for both 2024 and 2025, while that of the euro area has been lowered. The outlook for India remains unchanged compared to the July update. The Fund expects India to grow at 7 per cent and 6.5 per cent, respectively, this year and next. The growth projection for China has been lowered by 20 basis points for 2024. Beyond the standard projection, the WEO talks about policy pivots and threats that are worth discussing here.

In terms of policy, as the foreword to the WEO by IMF Economic Counsellor Pierre-Olivier Gourinchas notes, the battle against inflation has been broadly won. Although the growth rate is lower than in the pre-pandemic period and is likely to remain that way in the foreseeable future, the world economy has remained resilient despite multiple shocks over the past few years, such as the pandemic, war, and geopolitical tensions, and a sharp policy tightening by large central banks. Although the inflation rates are still above the target in some advanced countries, they are relatively comfortable, and central banks have started cutting policy rates. This should help ease financial conditions, including for developing economies, which will support economic activity. While part of the disinflation can be attributed to the easing of shocks, monetary policy played an important role in keeping the inflation expectations anchored and preventing a wage-price spiral. However, central banks will need to remain vigilant.

The other policy issue is that of stabilising debt. After most countries adopted loose fiscal policy in the aftermath of the pandemic, it is time to build buffers. However, as the IMF notes, under the current fiscal plans, debt dynamics are not stable for countries like the US and China. Delayed adjustment in fiscal position in large global economies always carries a risk of market disruption. While the budget deficit has moved up structurally in the US, China may have to continue fiscal interventions at different levels to support economic growth. While the global economic outlook is stable, though, with lower growth, there are still several downside risks in the medium term.

For instance, if the problem in China’s property market turns out to be deeper than expected, it could have a spillover effect on both the Chinese and the global economy. Several countries with large deficits and external financial requirements may continue to face difficulties. A lot will also depend on the outcome of the US presidential elections. Nonetheless, the biggest near-term risk perhaps is the escalation of tensions in West Asia, and those can significantly disrupt supply chains and push up commodity prices. For India, while growth remains stable and the disinflation process is underway, it also needs to build fiscal buffers. Although the budget deficit is firmly declining, the future path requires greater policy clarity. In the short to medium term, policy interventions will be needed in India to overcome persistent slower global growth and to build policy space to manage potential risks.