With inflation not falling as quickly as previously expected, central bank interest rates will remain higher for longer than expected. That was the main conclusion emerging from the International Monetary Fund's (IMF) latest World Economic Outlook released on Tuesday.
Pierre-Olivier Grunschas, chief economist at the International Monetary Fund (IMF), during a press conference on April 16, 2024. [AP Photo/Jacquelyn Martin]
In an interview with the Financial Times about the report, IMF chief economist Pierre-Olivier Grunschas said central bankers should “prepare for further challenges” as they seek to bring down inflation.
He said upward pressure on services prices in both the United States and Europe remained “persistent” despite overall inflation falling.
The IMF's latest update said that in regions where risks of rising inflation are materializing, central banks should “refrain from easing monetary policy too early and remain open to further tightening if necessary.”
But maintaining high interest rates will have consequences.
“The risk of higher inflation increases the prospect of interest rates remaining elevated for longer, thereby increasing external, fiscal and financial risks.”
Outlining some of these risks, it warned that rising U.S. interest rates, which tend to boost the value of the dollar, could lead to a global interest rate differential, which “could disrupt capital flows, impede planned monetary easing and adversely affect growth.”
With interest rates remaining high, the government needed to cut spending.
The update states: “If fiscal improvements do not offset rising real interest rates amid weakening potential growth, persistently high interest rates could lead to further increases in borrowing costs, with implications for financial stability.”
Translated into economic terms, this means that because rising interest rates mean that governments are paying more interest on their debt, they need to cut spending lest their growing mountain of debt lead to greater financial turmoil, particularly in the United States.
To underscore this point, and with its eye firmly on the US elections in November, the Fed warned that “significant shifts in economic policy” carry “fiscal overspending risks” that could worsen “debt trends”.
Goulinchas commented on these issues in an IMF update blog: In calling for cuts in government spending, he said stronger “fiscal buffers” were needed to ensure the necessary resources to deal with unexpected shocks, not for military spending, which the IMF acknowledges is untouchable, but for social welfare spending.
“But,” he continued, “the measures are insufficient and economic policy uncertainty is growing. The outlook for fiscal consolidation is [the code phrase for spending cuts] “Many countries are running significantly underfunded budget deficits. It is worrying that a full-employment country like the United States is maintaining a fiscal stance that is steadily increasing its debt-to-GDP ratio, posing risks to both the domestic and global economies. It is also worrying that the United States is becoming more reliant on short-term financing.”
He warned that with rising debt, slowing growth and widening fiscal deficits, “it won't be long before debt trajectories in many places become much more volatile, especially if markets push up sovereign bond spreads, posing risks to financial stability.”
The IMF said global growth was in line with projections made in its April World Economic Outlook report, which forecast growth of 3.2% in 2024 and 3.3% in 2025.
However, the report found that the composition of growth had changed significantly, with many countries seeing unexpected upside surprises, while the United States and Japan saw notable “downside surprises.”
“In the United States, growth slowed more sharply than expected after a long period of strong performance, reflecting weaker consumption and a negative contribution from trade,” the report said.
Growth forecasts for 2024 have been revised downward by 0.1 percentage point to 2.6 percent, while growth in 2025 is expected to be 1.9 percent as “the labor market cools, consumption slows and fiscal policy begins to gradually tighten.”
Japan's growth rate was revised down by 0.2 percentage points due to supply disruptions and weak private investment in the first quarter.
The IMF said “Europe is showing signs of economic recovery,” but the outlook is at least somewhat tepid, because the latest report noted that “persistent weakness in manufacturing may slow the recovery in countries such as Germany.” [Europe’s largest economy].”
While the economies of the world's first, third and fourth largest economies — the United States, Germany and Japan — are slowing, the global economy as a whole is being supported by growth in China, India and other so-called emerging and developing countries.
The IMF revised China's growth forecast for 2024 upwards to 5%, but suggested this would be unsustainable, slowing to 4.5% in 2025 and continuing to slow in the medium term, dropping to 3.3% by 2029.
As is always the case in reports from central banks and global financial institutions, the IMF's latest report focused on wages in the so-called fight against inflation.
“In terms of the deflationary path, services price and wage inflation are the two main concerns,” Gorinkas wrote in a blog post, arguing that “real wages are now approaching pre-pandemic levels in many countries.”
This assertion is in direct contradiction to the lived experience of hundreds of millions of workers around the world who are facing higher mortgage payments due to rising interest rates, higher prices for basic necessities and reduced disposable income.
It is an undeniable fact that the spike in inflation that began in 2021 had absolutely nothing to do with wage demands, but was the result of the supply chain crisis caused by the pandemic, the effects of the US and NATO-instigated war in Ukraine, and profit rip-offs by global food and energy giants.
But finance capital and its representatives, such as the IMF, demand that the working class pay the price through the suppression of wage demands through below-inflation wage agreements imposed by trade union bureaucrats and through increased unemployment, euphemistically called “economic cooling.”
The IMF also warned that “escalating trade tensions could raise the cost of imported goods through supply chains, further increasing near-term inflation risks.”
Gorinchas expanded on this issue in a blog comment, noting that “the gradual dismantling of the multilateral trading system is another key concern.”
“Now, more countries are going their own way, imposing unilateral tariffs and industrial policy measures that are in doubtful compliance with World Trade Organization rules.”
These measures could “distort trade and resource allocation, encourage retaliation, undermine growth, reduce living standards, and make policy coordination more difficult to address global challenges such as climate change.”
The update itself concludes with a weak appeal for all countries to “curtail the use of trade-distorting measures and work instead to strengthen the multilateral trading system.”
But while the IMF cannot admit it publicly, it is well aware that this cannot happen as the post-war economic order is visibly disintegrating in a context of intensifying economic and geopolitical competition and a descent into war.
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