IMF Managing Director Kristalina Georgieva said the US economy was doing “quite a bit better” than expected, although there was high uncertainty around the trade policies of the administration of President-elect Donald Trump that was adding to headwinds facing the global economy and driving long-term interest rates higher.
With inflation moving closer to the US Federal Reserve’s target, and data showing a stable labor market, the Fed could afford to wait for more data before undertaking further interest rate cuts, she said. Overall, interest rates were expected to stay “somewhat higher for quite some time,” she said.
The IMF saw divergent trends in different regions, with growth expected to stall somewhat in the European Union and to weaken “a little” in India, while Brazil was facing somewhat higher inflation, Georgieva said.
In China, the world’s second-largest economy after the United States, the IMF was seeing deflationary pressure and ongoing challenges with domestic demand, she said.
Lower-income countries, despite reform efforts, were in a position where any new shocks would hit them “quite negatively,” she said.
Georgieva said it was notable that higher interest rates needed to combat inflation had not pushed the global economy into recession, but headline inflation developments were divergent, which meant central bankers needed to carefully monitor local data.
The strong US dollar could potentially result in higher funding costs for emerging market economies and especially low-income countries, she said.
Most countries needed to cut fiscal spending after high outlays during the Covid pandemic and adopt reforms to boost growth in a durable way, she said, adding that in most cases this could be done while protecting their growth prospects.
“Countries cannot borrow their way out. They can only grow out of this problem,” she said, noting that the medium-growth prospects for the world were the lowest seen in decades.
