IMF projects 3.3 percent global growth in 2025, inflation to fall to 3.5 percent by 2026

The International Monetary Fund (IMF) forecasts that global economic growth will stabilize at 3.3% in 2025, reflecting a significant slowdown in growth since the pandemic. Inflation is also declining, projected to fall to 4.2% this year and 3.5% in 2026, aligning with central bank targets. This shift aims to end the global turmoil triggered by the pandemic and geopolitical events, including Russia's invasion of Ukraine, which caused inflation to reach four-decade highs.

While the global growth forecast remains stable, the gap between countries is widening. The U.S. economy is performing strongly, with growth expectations revised upward to 2.7% this year, driven by robust domestic demand. In contrast, the Eurozone is expected to achieve only modest growth of 1%, due to weak manufacturing, low consumer confidence, and persistent energy price pressures.

Emerging market economies are projected to maintain growth rates of 4.2% and 4.3% this year and next, respectively. However, trade and policy uncertainties are dampening demand. China's growth is expected to be 4.5% next year, higher than previous forecasts, but its economic activity also faces its own challenges.

The divergence in growth trajectories is partly cyclical, with the U.S. economy outperforming its potential while Europe and China lag relatively behind. However, structural factors are contributing to the persistent gaps. The U.S. benefits from stronger productivity growth, especially in the technology sector, along with a favorable business environment and deeper capital markets. This leads to higher returns on investment, greater foreign capital inflows, and increasing living standards.

The current economic situation is characterized by heightened policy uncertainty, especially after recent elections in many countries. There are risks that could exacerbate existing disparities. European economies could unexpectedly slow down if public debt sustainability issues arise, while China could fall into a debt deflation trap if fiscal and monetary measures are insufficient.

In the U.S., policy changes by the new administration could reignite inflation in the short term. According to the IMF, looser fiscal policy and deregulation could stimulate demand, while higher tariffs could create negative supply shocks. This combination could lead to a resurgence of price pressures, complicating the Federal Reserve's ability to manage interest rates.

Medium-term risks include potential fiscal vulnerabilities stemming from recent U.S. policies. While deregulation may stimulate growth, excessive measures could undermine financial safeguards, increasing the likelihood of economic volatility. The report highlights that a resurgence of inflationary pressures could de-anchor inflation expectations, requiring flexible monetary policy responses.

Emerging market economies face additional challenges, including the impact of the dollar exchange rate on domestic prices. The IMF explains that these countries may need to allow their currencies to depreciate to stabilize their economies, while also adjusting monetary policy to maintain price stability. However, intervention may be needed in cases where inflation expectations become de-anchored or financial stability is at risk.

As countries navigate these complex issues, timely fiscal reforms are crucial to restore sustainability and build resilience against future shocks. The report suggests that without swift action, rising borrowing costs could lead to a vicious cycle of increased market skepticism and a greater need for adjustments.

Ultimately, the IMF emphasizes the importance of multilateral cooperation to foster a resilient global economy. Unilateral trade policies, such as tariffs or subsidies, tend to distort competition and can undermine long-term domestic prospects. Strengthening the international economic framework is essential to address future challenges and promote sustainable growth.