The IMF revised its growth forecasts upwards for emerging market and developing economies, driven primarily by robust economic activity in Asia, particularly in China and India. India, in particular, is expected to see growth surge to 7.0 percent in the current year.
In a recent update to its World Economic Outlook, the International Monetary Fund (IMF) on Tuesday raised concerns over the impact of elevated inflation on global growth prospects. The IMF, while maintaining its projections for 2024 at 3.2 per cent growth, has slightly revised upwards its forecast for 2025 to 3.3 per cent, citing persistent inflationary pressures.
The World Economic Outlook is a survey by the IMF staff usually published twice a year. It presents IMF staff economists’ analyses of global economic developments during the near and medium term.
According to the IMF’s July update, the heightened risk of inflation has necessitated longer periods of higher interest rates. This stance, aimed at curbing inflation, also brings with it increased external, fiscal, and financial risks. The IMF warned that failure to balance these with fiscal improvements amid lower potential growth could destabilize financial markets and raise borrowing costs globally.
“The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks,” the IMF said in a July update to its World Economic Output report.
“Persistently high interest rates could raise borrowing costs further and affect financial stability if fiscal improvements do not offset higher real rates amid lower potential growth.
The current inflationary trend has been attributed to expansive monetary policies adopted by major economies such as the US, UK, and European nations during the COVID-19 pandemic. These policies involved substantial money printing and increased government spending, which, while initially aimed at stabilizing economies, have contributed to rising inflation levels unseen since the early 1980s.
In response to mounting inflationary pressures, central banks in advanced economies have been cautious about reducing interest rates. The US Federal Reserve, for instance, delayed rate hikes, attributing inflation spikes to temporary “supply shocks” exacerbated by global economic conditions, including geopolitical tensions.
The IMF emphasized that while inflationary pressures are expected to ease by the end of 2025, particularly due to anticipated declines in energy prices and cooling labour markets, emerging market and developing economies are likely to experience a slower decline in inflation rates compared to advanced economies.
Furthermore, the IMF highlighted risks associated with exchange rate fluctuations, particularly concerning emerging markets with significant foreign currency-denominated debt. These economies, while benefiting from robust growth in recent projections, remain vulnerable to capital outflows and currency depreciation if interest rate differentials with the US widen further.
The IMF’s policy recommendations included advocating for prudent use of foreign reserves to mitigate potential financial shocks and advocating for macroprudential policies to manage risks from excessive foreign-currency-denominated debt.
Looking ahead, the IMF revised its growth forecasts upwards for emerging market and developing economies, driven primarily by robust economic activity in Asia, particularly in China and India. India, in particular, is expected to see growth surge to 7.0 per cent in the current year, bolstered by improved prospects in private consumption, especially in rural areas.
While global growth projections have been adjusted upwards, the IMF remains cautious about the potential long-term impacts of current inflationary trends and advises policymakers worldwide to tread carefully with monetary policies to ensure sustainable and balanced economic growth.
