The International Monetary Fund (IMF) has upgraded its forecast for US economic growth to 2.7% this year, which is higher than previously predicted. This strong performance of the US economy is expected to be a major driver of global growth in 2022. In contrast, the European economy is struggling to regain momentum after the pandemic, with high interest rates and energy costs weighing on activity. The global economy is expected to expand by 3.2%, with China’s economy forecasted to grow by 4.6% and India’s by 6.8%.
The IMF chief economist, Pierre-Olivier Gourinchas, cautioned against the US economy’s overheating and emphasized the need for a cautious and gradual approach to monetary easing by the Federal Reserve. The US economy has already surpassed its pre-pandemic growth trend, leading to concerns about rising inflation. Inflation in the US has ticked up in recent months after falling from a peak of 9.1% in June 2022. The strong demand in an overheated economy can lead to inflationary pressures.
Strategists at UBS see a real risk that the Fed may not cut borrowing costs and could resume raising rates by early next year. High government spending and debt levels in the US are also posing upside risks to inflation. In contrast, the euro area shows little evidence of overheating, and the European Central Bank will need to carefully calibrate its pivot toward monetary easing to avoid falling below its 2% inflation target.
The IMF expects global inflation to average 5.9% this year, slightly above its January forecast. Progress toward inflation targets has stalled, with stubbornly high inflation in services and recent increases in oil prices. Supply chain frictions easing and lower energy costs have dampened inflation, but rising oil prices and tensions in the Middle East could push prices higher. Further trade restrictions on Chinese exports could also contribute to higher goods inflation.
Officials in Europe and the US have voiced concerns about potential dumping by China, leading to the possibility of tariffs on Chinese products that could increase broader inflation. China’s strong economic growth, reflected in its 5.3% expansion in the first quarter of 2022, could also pose a risk to global inflation. The jump in high-tech manufacturing in China has supported oil prices. Overall, uncertainties surrounding inflation and global economic growth require careful monitoring and policy adjustments to manage potential risks.
