In its October update of the World Economic Outlook, the International Monetary Fund (IMF) forecasts global economic growth to stabilize at approximately 3.2% for 2024 and 2025, maintaining nearly the same projection as three months prior. However, the IMF warns of significant underlying uncertainties beneath this apparent stability. IMF Chief Economist Pierre-Olivier Gourinchas has highlighted ongoing risks to the global economy, including escalating geopolitical tensions in the Middle East, rising protectionism, and potentially restrictive global monetary policies.
Against this backdrop, a 21st Century Business Herald reporter conducted an in-depth interview with Jean-Marc Natal, Deputy Division Chief of the IMF’s World Economic Studies Division, to discuss key issues such as inflation, interest rate policies, and the economic outlook for emerging markets. Natal explained the factors contributing to persistent inflation in the service sector post-pandemic, noting that as consumer demand returns to services, alongside rising wages, service prices have remained under pressure. He also mentioned that while global inflation shows signs of moderation, volatility in commodity prices—especially energy prices affected by geopolitical and extreme weather events—could still pose risks, influencing global inflation trajectories and central bank policies.
The IMF report also highlights a moderate growth outlook for advanced economies, with Europe facing particular challenges, whereas emerging markets demonstrate relative resilience. China and India, as key players in the Asia-Pacific region, are expected to grow by 4.8% and 7.0%, respectively, in 2024. However, subdued consumer and investor confidence remains a challenge for China’s economic growth. Natal suggested that while China’s export sector is performing well, sustained growth would require efforts to stimulate domestic demand and improve the real estate market.
21st Century Business Herald : The World Economic Outlook report highlights that while this inflation is underway, it's shown signs of slowing down, especially in the service sector. So what are the key factors contributing to the persistent inflation in the service sector and how should policymakers address this challenge?
Jean Marc: If you go back to pandemic, there was a shift in demand from services to goods when people were at home. As soon as the economy reopened, there was a switch back. So since then, there has been a demand for services that is actually catching up the previous demand for goods and putting some pressure on prices. So that's what explains the higher services inflation. At the same time, there was also, of course, a demand of labor to produce these services. So you also see high inflation in the wage sector, in the labor market, high wage inflation that correspond to these services inflation.
21st Century Business Herald: So how significant is the risk of inflation coming back recently again?
Jean Marc: The baseline forecast inflation to continue going down the path, and we have so far indication that it's been very stable and continued in the recent past. So we have indication it's continuing. Now, of course, that's how we describe it in the report. There can be bumps in the road. And one of the bumps in the roads could be commodity prices. So you saw geopolitical tension flare up in the Middle East and another part of the world. So this could put some pressure on commodity prices, which would then, if persistent, could feed to inflation again. So that's one of the possibilities for inflation to go back. And that, of course, creates a new challenge for central banks.
21st Century Business Herald: You just mentioned the commodity price. With oil prices projected to rise in 2024, because driven by OPEC+ production cuts and the geopolitical tensions you just mentioned. So how significant is the risk of another commodity price shock? And how might this impact inflation and economic recovery in both advanced as well as emerging markets?
Jean Marc: So the likelihood of it is difficult. I mean, it's a shock. It can happen anytime. There could be a flare-up in conflicts and leading to higher commodity prices, oil prices in particular. It could also be a weather event. So all things are possible. The forecast in the WEO(World Economic Outlook) shows that oil prices, which are the ones we usually discuss when talking about inflation, are actually expected to remain rather stable along the path. There are many factors on both sides, as you pointed out, that could change oil prices. What we can be sure of is that there will be more volatility in the next few couple of years. If shocks lead to higher prices, if these are permanent, then you could have a second-round effect on inflation and potentially, if the reaction of central bank is not sharp enough, increasing inflation expectations.
21st Century Business Herald: Right now, central banks, starting by the Federal Reserve, already started the cycle of easing monetary policy. So with advanced economies expected to cut interest rates in the coming years, how do you see the shift impacting the capital flows of the emerging markets?
Jean Marc: You saw in a couple of quarters ago, when most advanced central bank and the Federal Reserve in particular started raising rates, you saw the impact on exchange rate and capital flows from emerging markets. That puts some pressure on some of the developing economy in particular, puts some pressure on their interest rate and on their debt. This is the part that's complicated for emerging market. Now, if you have the reverse, you will see the exact opposite. So the expectation is that easier condition in advanced economy will help emerging market and developing economy lower the burden of debt and have an effect on exchange rate, appreciating it. So we've seen that in the recent past. As soon as the Fed pivoted, then you saw exchange rates appreciate in many of the emerging markets and retracing part of the depreciation that had happened before.
21st Century Business Herald: In the World Economic Outlook report, it also points out that advanced economies are generally already catching up with pre-pandemic level of output and also inflations. However, the developing economies continue to face output shortfalls. So what are some key areas within developing economies that may drive future growth as these countries continue to work close these gaps?
Jean Marc: It's a big question. It's difficult to give you a general answer. It will be country-specific, but I think I can point to two areas. So one is the stabilization. Microeconomic stabilization post-pandemic has been more difficult in emerging and developing economies. You saw impact on debt and inflation. The first for these countries to be able to catch up, the first order on the agenda is to deal with inflation and achieve price stability. As long as that is not achieved, rates will stay high and that will affect debt and make it difficult for them to fund development expenditure. So the first order of business for them is to handle inflation and to reach price stability. The second area that I would point to is to boost growth, you need to implement structural reform. And of course, again, it will vary across countries, which structural reform is the more pressing. An SDM from a year and a half ago showed that for many emerging markets, it is crucial to start with reforms that prioritize the removal of the most binding constraints on growth. Things like governance, business regulation, external sector reform, and competition reforms all have significant effects and can help pave the way for other reforms to boost growth. So first comes stabilization, and in parallel, structural reforms will boost growth in these economies.
21st Century Business Herald: China's growth outlook for 2024 has been adjusted to 4.8%. So What do you think are the key factors that will keep China's economy growing?
Jean Marc: It all depends on your starting point, right? So there is an upgrade with respect to April, but a downgrade with respect to July. So, basically, what has held up well is exports. Exports have performed very well in China. However, the current issues are consumption and investment. As long as a comprehensive solution is not found for the real estate sector, confidence will remain low, consumption will stay weak, and this will hamper China's growth in the next couple of years.
