IMF warns war and protectionism to hurt world economy

The world’s central banks need to focus more on supporting economic growth, especially in those countries where inflation is no longer the problem it was, the International Monetary Fund urged on Tuesday.

In a new edition of its World Economic Outlook, the Fund welcomed the return of inflation to more moderate levels but warned that escalation in regional conflicts and a rise in protectionism are posing big risks to global economy that is struggling to generate momentum.

“We think the risks are tilted to the downside,” said IMF Deputy Director of Research, Petya Koeva-Brooks, flagging that the Fund’s outlook has darkened in the six months since the last WEO update. As in April, it still sees the world economy growing 3.2 percent this year, but it warned that various factors such as lackluster productivity growth are set to stop it improving much in the coming years. For 2025, it trimmed its forecast to 3.2 percent from 3.3 percent in April.

“We have three main policy recommendations,” Koeva-Brooks said, highlighting that the first is “for central banks to pivot towards providing more support to activity where inflation is under control.”

By contrast, she added that governments should tighten fiscal policy to draw a line under the emergency measures of the pandemic years, as well as enacting implement structural reforms to boost productivity and increase the supply of labor.

It predicted that the eurozone will grow by only 0.8 percent this year, while the U.S., which has fared better on productivity and labor supply in recent years, will grow 2.8 percent. However, it expects an acceleration in the eurozone to 1.1 percent and a slowdown to 2.2 percent in the U.S. next year.

The Fund also expects a marked slowdown in China, despite recent efforts by Beijing to prop up the economy. It sees growth of only 4.8 percent this year, short of the official 5 percent target, slowing to 4.5 percent in 2025.