So far, the script was pretty clear. After the rise in raw materials prices, bottlenecks and the rebound in prices, the global economy was destined to return to normal this year. In 2024, economists predicted a progressive decrease in interest rates, as inflation returned to acceptable levels, close to 2%, and the reactivation of the economy.
However, although this remains the base scenario, things can go wrong. The International Monetary Fund (IMF) today presented its report on the spring meetings taking place this week in Washington. And it is true that everything points to a resilient economy in a context of slowing inflation for this year, thanks to the support of public policies and the consumption of post-pandemic savings.
At the end of 2024, the IMF forecasts interest rates of 4.6% in the United States (down from 5.4%) and 3.3% in the eurozone (down from 4%). Global growth this year and the next would be 3.3%, somewhat stable but a softer pace compared to the average of the last 20 years. Tighter monetary policies and the withdrawal of fiscal stimuli undoubtedly have something to do with it.
If you look at the countries in detail, there are several interesting aspects. One is the spectacular strength of the United States, with domestic consumption and the labor market as pillars. The IMF has improved the “impressive” growth by six tenths to 2.7%. “The exceptional recent performance of the United States is certainly impressive and an important driver of global growth,” the report maintains. “But it also reflects strong demand factors, including a fiscal stance that is not in line with long-term fiscal sustainability.” Indeed, Washington’s excessive spending, according to the report, risks reigniting inflation and undermining long-term fiscal and financial stability. “Something will have to give,” the IMF has warned.
The other protagonist is Russia. It is aiming for 3.2% growth this year, which exceeds that of most countries that have imposed sanctions on it over the Ukraine war. The IMF highlights that the volume of oil exports is sustained (evidently, despite the Western embargo), in addition to an activity supported by public spending on defense. “However, its growth is lower than what it used to register before the war,” the Fund’s economists point out.
China, which has just released its data on growth in the first quarter (5.3%), oscillates between government support and weakness in the real estate sector.
As for Europe, it is currently the weak ring among advanced economies. All in all, the outlook for the eurozone is more optimistic in 2024: it goes from the meager 0.4% in 2023 to 0.8% this year and 1.5% the next. The distance and gap between the European and North American economies is increasing more and more (and has been doing so for approximately a decade). As announced last Friday, Spain stands out with 1.9% and 2.1%, respectively.
As a detail, the IMF has cut the economic growth prospects for Israel in 2024 by 1.4 points and has stopped publishing data on the West Bank and the Gaza Strip, due to the war in the second of those Palestinian enclaves. The organization expects that the Israeli gross domestic product will grow by 1.6% this year, which represents a sharp reduction compared to the 3% it had predicted in its report from October last year, before the conflict began in the zone.
But, as we said at the beginning, in scripts (those well written) there can be unexpected or unforeseen turns. And the IMF has pointed out several scenarios and possible risks that could spoil the plans for the film shot so far. Let’s start with global trade. In general terms, this year it should get out of the hole it entered in 2023 and return to a cruising pace, the IMF points out that a change in behavior is occurring. Trade restrictions increase. There were 3,200 measures of these characteristics in 2022 and another 3,000 in 2023. Much higher levels compared to the 1,100 in 2019: global value chains are under attack. “The growth of trade flow between geopolitical blocs has since decreased significantly compared to the growth of trade within the blocs,” the study notes.
And then there are wars. Taking into account the uncertainty that is being experienced these days in the Middle East and Ukraine, the geopolitical factor has all the points to spoil the party.
In the event of the extension of a large-scale military conflict in the region, global inflation could rise 70 basis points in 2024 (seven tenths). Much of this increase would be attributable to oil prices, which would rise up to 15% as a result of a worsening of tensions in the Middle East. But underlying inflation could also increase by up to 30 basis points, due to disruptions in maritime transport and rising costs. The Fund’s estimates foresee a 150% increase in freight rates, a movement similar to that experienced after the first attacks in the Red Sea by the Houthis at the end of last year.
As a consequence of all this, interest rates could be up to 40 basis points higher than initially expected in 2025 (about four tenths). This would, in turn, affect the purchasing power of consumers and cause a loss of global GDP of 0.4%, always by 2025.
The IMF also dedicates a section to studying the electoral factor, since many countries will have elections this year. And this impact does not run the risk of being good either. For two reasons. First, the rise of populism, as several surveys point out. “In the context of the upcoming elections, measures are being adopted in many countries to raise barriers to the international flow of workers, which could reverse the progress of recent years and exacerbate the labor crisis, labor shortages and pressures In addition, tariff increases could trigger retaliatory responses, increase costs, and harm business profitability and consumer well-being,” the IMF economists write.
Second, closer to electoral events, governments tend to be more generous and increase public spending. “These fiscal expansions could increase inflationary pressures. This could lead to higher interest rates, increasing the difficulty of reducing debt and a negative impact on growth.”
Although it is not uncommon for the IMF to be wrong in its forecasts and calculations, many hope that the film will have no unforeseen events and will be flat, predictable (and profitable).
