Global economy faces sluggish growth, uncertain future, warns IMF

January 18, 2025 — The global economy is navigating a period of sluggish growth and faces a range of uncertainties, according to the International Monetary Fund’s (IMF) latest World Economic Outlook. The report projects global growth at 3.3% for both 2025 and 2026, a figure that falls short of the historical average of 3.7% and represents little change from the October 2024 forecast. This seemingly stable global figure, however, masks significant divergences between different economies.

The United States stands out with a projected growth of 2.7% in 2025, driven by robust domestic demand. In contrast, the euro area is expected to experience a more gradual recovery, with growth projected at just 1.0% in 2025, hampered by persistent geopolitical tensions. While progress on disinflation is anticipated, with global inflation expected to decline to 4.2% in 2025 and 3.5% in 2026, medium-term risks lean towards further economic slowdown.

Several factors contribute to this downside risk. Heightened trade policy uncertainty, the potential impact of looser fiscal policy in the United States, and ongoing adjustments in energy and real estate markets all pose threats to future growth. There are, however, potential upside scenarios. A boost to the US economy could materialize from deregulation and increased business confidence, and cooperative trade agreements could reduce uncertainty and bolster global growth.

On the other hand, escalating trade tensions and protectionist policies could dampen investment and disrupt global supply chains. A weaker fiscal outlook or stalled structural reforms in some countries could further exacerbate economic challenges. Geopolitical tensions, particularly those that could lead to renewed spikes in commodity prices, also represent a significant risk.

In light of these challenges, the IMF has outlined key policy priorities. Central banks are urged to carefully manage monetary policy to balance the need for price stability with support for economic activity. Fiscal consolidation is deemed necessary to ensure public debt sustainability and create room for future policy responses. The IMF also advises countries with well-developed foreign exchange markets to utilize exchange rate flexibility to manage capital flows. Crucially, the report emphasizes the need for structural reforms in areas such as labor markets and competition to boost productivity and long-term growth. Finally, the IMF stresses the importance of strengthened multilateral cooperation to effectively address global challenges and maintain a stable, rules-based trading system.

The overall outlook for the global economy remains clouded by uncertainty. The potential for both positive and negative developments highlights the delicate balance policymakers must strike. Their success in navigating these complex risks will ultimately determine the future trajectory of global economic growth.

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