05

On January 17, 2025, the International Monetary Fund (IMF) released its World Economic Outlook (WEO) update, titled “Global Growth: Divergent and Uncertain.” The report projects global growth at 3.3% for both 2025 and 2026, which is below the historical average of 3.7% from 2000 to 2019. The 2025 projection remains largely unchanged from the October 2024 WEO report, though there has been an upward revision for the United States and a downward revision for other major economies. This article explores the key points and risks highlighted in the IMF’s WEO Update, January 2025, and concludes with some insights.

Inflation Outlook

Global headline inflation is expected to decline to 4.2% in 2025 and further to 3.5% in 2026. According to the IMF, inflation in advanced economies is anticipated to return to central bank targets, in contrast to emerging and developing economies, where inflation may persist at higher levels.

The report suggests that disinflationary trends will continue, with few deviations from the IMF’s October 2024 projections. The gradual cooling of labor markets is expected to keep demand pressures under control, while the anticipated drop in energy prices will further contribute to falling inflation. However, while inflationary pressures are expected to be more subdued in the euro area, the U.S. inflation rate is projected to remain slightly above the 2% target in 2025. China is expected to maintain low inflation, which could widen the policy rate differential between the U.S. and other countries.

Regional Differences

While global growth estimates remain largely unchanged since October 2024, the diverge nce between countries has deepened. The U.S. economy, driven by strong domestic demand, is performing better than anticipated, prompting the IMF to revise its growth projection for the U.S. upwards by 0.5 percentage points to 2.7% for 2025.

In contrast, growth in the euro area is expected to accelerate only slightly, from 0.8% in 2024 to 1% in 2025. Weak manufacturing activity, poor consumer confidence, and the ongoing impact of high energy prices remain key obstacles. European gas prices, for example, are now about five times higher than in the U.S., compared to double the price before the pandemic.

Growth forecasts for developing market economies remain stable at 4.2% for 2025 and 4.3% for 2026. However, in many of these economies, low demand is a result of high trade and policy uncertainty. Once this uncertainty dissipates, economic activity is expected to pick up. In China, the IMF has slightly revised its growth forecast upwards to 4.5% for 2025, an increase of 0.4 percentage points from the previous forecast. India’s growth rate remains unchanged at 6.5% for both 2025 and 2026, consistent with its potential growth rate, according to the report.

While large economies have diverged cyclically, with the U.S. outperforming and Europe and China under-performing, the report suggests that this cyclical divergence will fade under current policies. Structural factors, however, are responsible for the ongoing gap between the U.S. and Europe. If these structural issues are not addressed, the disparity is likely to persist.

The report highlights consistently higher productivity growth in the U.S., particularly in the technology sector, which has been supported by deeper capital markets and a more conducive business environment. These factors have led to higher returns on U.S. investments, stronger capital inflows, a stronger dollar, and a relative decline in living standards in the U.S. compared to other developed economies. Meanwhile, China’s growth trajectory now closely resembles that of other emerging market economies.

Forces shaping the outlook

The global economy is stable, but growth rates vary significantly across countries. In 2024, China’s growth fell short of expectations at 4.7%, primarily due to a downturn in the real estate market and weak consumer spending. Meanwhile, India’s growth slowed more than anticipated due to a downturn in industrial activity. Japan also faced a slight output decline due to temporary supply issues. On the other hand, strong consumption drove the U.S. economy to robust growth of 2.7%.

Risks and Policy Recommendations

The near-term forecast is defined by divergent risks, while medium-term growth risks are tilted to the downside. Disruptions to the ongoing disinflation process, caused by policy missteps, could derail the shift toward monetary policy easing, affecting financial stability and fiscal sustainability.

The IMF emphasizes the need for policymakers to restore fiscal buffers, balance inflation and real activity trade-offs, and implement structural reforms to improve medium-term growth prospects. It also advocates for enhanced international cooperation.

Conclusion

The IMF’s report stresses a balanced approach to managing inflation and supporting economic activity. The focus should be on rebuilding fiscal buffers, balancing economic activity with inflation, and promoting structural reforms.

The WEO update underscores that the path of disinflation must be maintained, as inflation remains a concern in many economies. Inflationary pressures are expected to resurface in the coming months. Monetary policy should remain responsive and proactive to prevent inflation expectations from becoming unanchored. Additionally, macro-financial policies must be vigilant in identifying and mitigating financial risks.

In many economies, fiscal policy measures to stabilize debt dynamics have been either insufficient or delayed. It is crucial to restore fiscal sustainability before it becomes too late and to build buffers to handle potential large-scale shocks in the future.

Given these challenges, it is vital for policymakers to approach both monetary and fiscal policy with caution. While the report highlights divergence within developed economies, it pays less attention to the divergence within and between emerging and developing economies, which is an area that warrants further focus.