WEF: Global economy on track for steady 3.3% growth in 2025 & 2026

The global economy is anticipated to experience a steady recovery in the coming years, with growth expected to hold at 3.3 per cent in 2025 and 2026, according to the World Economic Forum. The decline in inflation to 4.2 per cent in 2025 and further to 3.5 per cent in 2026 indicates a return to central bank targets, marking the conclusion of a turbulent period characterized by the pandemic, the conflict in Ukraine, and a 40-year high in inflation. Pierre-Olivier Gourinchas, the Chief Economist at the International Monetary Fund (IMF), delves deeper into these economic projections. The latest forecasts suggest that global growth will remain stable at 3.3 per cent this year and the next, aligning closely with the world's potential growth. The decrease in inflation to 4.2 per cent in 2025 and 3.5 per cent in 2026 reflects a retreat to central bank goals. This signifies the resolution of major global disruptions triggered by the pandemic and the war in Ukraine, which led to the highest inflation surge in four decades. It signifies the end of a cyclical phase and the initiation of a new one. Although the overall global outlook remains similar to that of October, variations are emerging. Advanced economies exhibit contrasting trajectories, with the United States displaying stronger performance than previously anticipated, projected to expand by 2.7 per cent this year. On the contrary, growth in the euro area has been revised downwards, with a slight growth of only 1 per cent expected in 2025 due to low consumer confidence and persistent high energy prices compared to the US. Heightened trade policy uncertainties are poised to contribute to feeble demand in many nations, including China, where a growth rate of 4.6 per cent is predicted for this year. Some of the divergences observed are structural in nature. For example, the US has maintained consistently robust productivity growth compared to Europe, especially in the technology sector, attributed to a favorable business environment and more extensive capital markets. Among emerging economies, potential growth has decreased for China in accordance with long-term and demographic trends, but increased in other developing markets, bringing the two more in line. Addressing the risks in the current landscape, economic policy indecision is prevalent, with potential policy shifts anticipated from several newly elected governments in 2024. In the short term, these risks could amplify differences between countries. The euro area might experience more significant deceleration than expected due to sluggish momentum in manufacturing and financial vulnerabilities in select nations. China also faces downside risks concerning a debt deflation trap, as demonstrated by the mounting apprehension among investors observable through the decline in Chinese government bond yields. These factors could reduce economic activity and inflation in both the euro area and China. In the US, uncertainties stem from potential policy alterations under the new administration. While the precise quantification of these impacts is challenging at present, they can be categorized into demand-stimulating risks, such as increased fiscal stimulus or a confidence surge, propelled by expected deregulation endeavors, which could enhance output and inflation in the near term. Conversely, supply-constraining risks like heightened tariffs or restrictions on migration could dampen output but contribute to price pressures. The collective impact on near-term output is uncertain, but likely tilts towards the upside. Any combination of these policies is anticipated to escalate price pressures in the US, impeding the Federal Reserve's intended interest rate reductions. These actions are also expected to bolster the dollar and tighten financial conditions elsewhere, notably for emerging markets and developing economies. Over the medium term, risks are predominantly skewed towards the downside. Restrictions on migration and protectionist measures are projected to impede potential output. The initial beneficial effects of fiscal expansion are anticipated to diminish, while the associated surge in public debt could trigger fiscal vulnerabilities down the line. The surge in long-term US yields, despite Federal Reserve interventions, signals market unease concerning forthcoming fiscal policies. Deregulation could stimulate output by eliminating bureaucratic hurdles and stimulating innovation but may also amplify financial risks. Another threat is the reemergence of inflation pressures shortly after the recent period, which could unsettle inflation expectations, given the heightened vigilance among individuals and businesses. Immediate inflation expectations have exceeded central bank targets. To navigate these challenges, central banks must remain attentive and be prepared to respond decisively to any inflation flare-ups while closely monitoring escalating financial risks. Furthermore, countries need to promptly replenish fiscal reserves in a manner that sustains growth. History underscores that delaying necessary adjustments in a low-growth, high-interest rate environment could trigger a loss of market confidence, compounding fiscal pressures. Countries should also endeavor to enhance growth by prioritizing ambitious structural reforms that foster resource allocation efficiency, boost government revenue, and nurture innovation and competition. It is imperative to uphold and enhance multilateral institutions to unlock a more prosperous, robust, and sustainable global economy.