The US economy is performing better than expected despite uncertainties surrounding the trade policies of the Trump administration, which are adding to headwinds for the global economy and pushing long-term interest rates higher, IMF Managing Director Kristalina Georgieva said.
The IMF chief pointed out that as inflation is moving closer to the US Federal Reserve's (FED) target and data shows a stable labor market, the FED may wait for more data to cut interest rates further. Overall, interest rates are expected to remain "a little higher for quite a while."
The IMF will release an update on its global economic outlook on January 17, just days before US President-elect Donald Trump takes office. IMF Managing Director Kristalina Georgieva’s disclosures are the first of the IMF’s global economic outlook for 2025, but she did not provide detailed forecasts.
In October 2024, the IMF raised its 2024 economic growth forecasts for the US, Brazil and the UK but lowered its forecasts for China, Japan and the eurozone due to risks from new trade wars, armed conflicts and tightening monetary policy.
At that time, the IMF kept its 2024 global growth forecast unchanged at 3.2% as it had forecast in July and lowered its 2025 global growth forecast of 3.2% by a tenth of a percentage point, warning that global medium-term growth would gradually decline to 3.1% over five years, well below the pre-pandemic trend.
“Given the size and role of the US economy, it is no surprise that the world is paying close attention to the policy direction of the incoming administration, particularly on taxes, deregulation and government efficiency,” said Kristalina Georgieva.
The exceptionally high uncertainty over US trade policy going forward adds to the headwinds facing the global economy, especially for countries and regions more integrated into global supply chains, small and medium-sized economies, and Asia in general, she added.
The IMF chief said it was "highly unusual" that this instability was reflected in higher long-term interest rates despite falling short-term rates. This is a trend that has not been seen in recent history.
The IMF sees different trends across regions, with growth expected to slow somewhat in the European Union and weaken slightly in India, while Brazil faces higher inflation. In China, the IMF is seeing deflationary pressures and continued challenges to domestic demand. Despite reform efforts, low-income countries are in a position where any new shocks would be “very negative,” Georgieva said.
It is worth noting that interest rates above the levels needed to fight inflation have not pushed the global economy into recession, Georgieva pointed out. However, headline inflation developments have varied, so central banks need to closely monitor local data.
IMF Managing Director Kristalina Georgieva said most countries need to cut back on fiscal spending after high spending during the COVID-19 pandemic and adopt reforms to boost growth in a sustainable way. Most countries can do this while protecting their growth prospects, she said.
