By Krishna Srinivasan
Global developments
Global growth has proven surprisingly resilient, and inflation continues to decline steadily. Stronger private and government spending upheld demand in 2023, despite tight monetary conditions. On the supply side, higher labour force participation, the unwinding of supply chain bottlenecks, and lower energy prices all supported activity.
For the world economy, we now project 3.1 percent growth for 2024 – the same growth rate as in 2023. For 2025, we anticipate a modest increase to 3.2 percent.
The good news is that these figures are somewhat better than the forecast we had in the October 2023 World Economic Outlook. The not so good news is that they remain significantly below the historical (2000-2019) average for global growth of 3.8 percent.
Global inflation is projected to fall from 6.8 percent in 2023 to 5.8 percent this year and to 4.4 percent in 2025. Core inflation is also on a downward trend.
Turning to Asia, the good news is that we have revised growth upward for both 2023 and 2024.
For 2023, we now estimate growth at 4.7 percent, compared to our 4.6 percent projection in October. China and India account for most of the upward revision. In China, growth was supported by higher spending on disaster reconstruction and resilience projects. In India, strong domestic demand underpinned another increase in our growth estimate.
We have also upgraded our regional growth forecast for 2024 to 4.5 percent, from 4.2 percent in October. What explains this?
- First, part of the positive dynamic from last year carries over into 2024.
- Second, a more supportive external environment, notably robust growth in the United States, reinforces domestic resilience. Demand for technology -computers, electronics, and optical products – has picked up in recent months, which benefits economies such as Korea and Singapore.
- Third, countries like China and Thailand have announced sizeable policy stimulus.
Overall, Asia is on track to deliver again two-thirds to global growth in 2024, as it did in 2023.
The regional average, however, hides significant divergence between countries. In Japan, we expect growth to remain above potential but to slow from about 2 percent in 2023 to about 1 percent in 2024, as one-off factors that supported activity last year fade – including a depreciated yen, strong tourism, and a recovery in business investment. Growth in India, on the other hand, is expected to remain strong at 6.5 percent in both 2024 and 2025.
For 2025, we project growth in the region to decelerate mildly to 4.3 percent, reflecting to a large extent China’s growth slowdown.
On inflation, the news has also been mostly positive, which improves the prospects for a soft landing.
Let me take half a step back. In Asia, post-COVID price pressures were, on average, less intense than elsewhere to begin with. They are now receding rapidly. We estimate that average Asian inflation fell from 3.8 percent in 2022 to 2.6 percent in 2023, with particularly swift progress in emerging Asian economies. Many regional central banks are on course to reach their inflation targets in 2024. Provided policymakers hold steady until inflation is firmly re-anchored, scope for monetary easing may emerge later in the year.
Again, the picture across Asia is not uniform. In China, inflation was only 0.3 percent in 2023, fueling concerns about deflation. The weakness reflects mainly lower food and energy prices but also subdued core inflation. Inflation is expected to recover gradually through 2025. In Japan, we expect inflation to slow from 3.2 percent in 2023, but to remain above the 2 percent inflation target until 2025.
The relatively benign inflation environment had unexpected side effects in 2023: with less price pressures to combat, Asian central banks needed to increase interest by less than their counterparts elsewhere. Hence, in the second half of 2023, the US Federal Funds rate exceeded the average policy rate in Emerging Asia – an unusual constellation that triggered depreciation pressures on Asian currencies in the fall of 2023.
These pressures have abated for now, as the Federal Reserve has signaled interest rate cuts going forward. However, there is a risk that divergent monetary stances in the United States and in Asia would trigger sharp exchange rate movements also this year. If so, central banks should avoid being distracted by temporary turbulence and focus firmly on price stability.
Even though the outlook has improved, important risks remain.
- First, a larger and more drawn-out correction in China’s property sector could curtail domestic demand further, especially if accompanied by stress in local government finances. It would also reduce demand for the regions’ exporters. On the upside, stronger-than-expected policy support in China could boost domestic demand and generate positive spillovers.
- Second, financial conditions are still volatile. Tighter-than-expected conditions in the United States or Asia could put pressure on heavily indebted industries and economies.
- Third, rising risks of geopolitical fragmentation are particularly onerous for Asia, given the region’s deep integration into global trade. We already see evidence of negative effects in the form of longer and less efficient supply chains. The threat of higher shipping costs reinforces risks to trade.
Now what should policymakers prioritize? In our view, this is the time to strengthen the resilience of Asia’s economies.
- Fiscal consolidation is key to restoring buffers and safeguarding debt sustainability. In 2023, budgetary balances improved somewhat in Asia, but consolidation was slower than we had anticipated. So, more belt-tightening will be needed.
- Strong financial supervision and systemic risk monitoring is needed to safeguard against potential financial sector vulnerabilities.
- Structural reforms remain imperative to boost productivity and mitigate challenges from global de-risking, while accelerating the green transition is essential for sustainable growth.
Before addressing your questions, please allow me to make a couple of points on the excellent cooperation between the IMF and the Japanese Authorities.
- We work closely together in many areas that support the global community, including through our regional office here in Tokyo. Akihiko Yoshida, who is sitting next to me, is the Director of that office, and will be answering some of your questions.
- I would also like to thank Japan for its steadfast support of the Fund. There are too many contributions to list them all, but let me mention a few highlights:
- Japan was critical for meeting the IMF’s fundraising targets for the Poverty Reduction and Growth Trust, or PRGT – the trust that allows the IMF to lend to lower-income countries at subsidized rates. Japan provided loan resources, as well as a subsidy contribution.
- In 2022-23, Japan also contributed to the Resilience and Sustainability Trust or RST: the trust that finances lending to address long-term structural challenges, such as climate change.
- Japan also raised its pledge regarding SDR channeling, which further strengthens the IMF’s ability to support low-income and vulnerable member countries.
- Beyond these financial contributions, Japan remains an important thought leader in the discussions of SDR channeling and a crucial and reliable partner of the Fund in its support for low-income countries.
These are just a few examples of the important role Japan has played in partnering with the IMF to support the global community.
