IMF claims inflation victory, but economic hurdles still loom

S&P 500 opened in the green this morning after the International Monetary Fund (IMF) declared victory against inflation that has been at the forefront of all financial debates since 2022.

But the financial agency continues to see significant economic risks ahead.

For one, the ongoing geopolitical conflicts could weigh on long-term growth, it argued in a report this morning.  

IMF now forecasts a sharp decline in global headline inflation from 5.8% on average this year to 3.5% by the end of 2025.

Inflation peaked at an annualised rate of 9.4% in late 2022.  

IMF’s forecast for global growth

IMF agreed that the majority of countries have successfully tamed inflation and orchestrated a soft landing.

Still, the “downside risks are increasing and now dominate the outlook”.

The fund expects the global economy to grow by a “stable yet underwhelming” 3.2% on a year-over-year basis both this year and in 2025.

But AI investments, it’s convinced, will help the United States and emerging economies in Asia to outperform moving forward.

On the other hand, the International Monetary Fund lowered its expectations for a number of advanced economies on Tuesday.

These included several other emerging markets as well as the largest ones in Europe, citing continued geopolitical tensions and the related risk to commodity prices.

IMF also urged the global central banks to remain vigilante in managing the labour market conditions and lowering inflation further in the months ahead.

Financial volatility could weigh on global growth

IMF also mentioned increased financial volatility as a potential risk to global growth in its World Economic Outlook on Tuesday.

“The return of financial market volatility over the summer has stirred old fears about hidden vulnerabilities.

This has heightened anxiety over the appropriate monetary policy stance,” the agency noted.

Markets sold-off suddenly and sharply over three weeks to August 5^th, with the benchmark S&P 500 index losing as much as close to 10%.

While global indices have since recovered, the International Monetary Fund continues to warn of further turbulence, especially if the final stretch of inflation proves rather stubborn in the months ahead.  

All in all, the ongoing war in Middle East and the related potential increase in commodity prices, interest rates keeping elevated for a bit too long, and a deeper contraction in the Chinese real estate market remain meaningful headwinds for global growth, as per the IMF.

In fact, the fund expects global growth to be capped at 3.1% towards the end of 2020s.