The International Monetary Fund (IMF) has projected that global central banks will start reducing interest rates in the latter part of the year as inflation eases, according to its latest World Economic Outlook report released on Tuesday. Despite this, the IMF anticipates resilient economic growth, forecasting a global expansion of 3.2% for this year, slightly higher than the January estimate.
The IMF now assesses the probability of a global recession at only 10%, defined by growth dipping below 2%. This shift is driven by the expected decline in global inflation, which is forecasted to decrease to 5.9% this year and 4.5% next year, compared to 6.8% last year. The decline in inflation is attributed to decreasing core inflation, aided by elevated interest rates, weakening labor markets, and relief from higher energy prices.
However, the IMF’s outlook for rate cuts varies across regions. Disparities in inflation and growth between the United States and Europe, among other developed nations, may result in different central bank timelines for rate adjustments.
In the U.S., the IMF foresees economic growth of 2.7% this year, an improvement from the 2.1% projected in January and faster than the solid 2.5% expansion in 2023. The IMF predicts the Federal Reserve’s policy rate to decline to 4.5%-4.75% by the fourth quarter of this year, implying three rate cuts, in line with the median projection of Federal Reserve officials as of their March policy meeting.
The European Central Bank is expected to initiate the first rate cut among major global central banks in June. The U.S. has experienced the most robust recovery among advanced economies, aided by increasing productivity growth.
The IMF also discusses the impact of artificial intelligence (AI) on the global economy. While AI could lead to increased investment and productivity growth in the near term, it may also result in job displacement and income inequality over the medium term. Advanced economies are likely to benefit from AI earlier than emerging markets and developing economies, with about 60% of workers potentially affected by AI in advanced economies.
