The global economy exhibited surprising resilience amidst the disinflationary phase from 2022 to 2023, with economic activity holding steady despite rising central bank interest rates. This resilience was supported by favourable demand and supply dynamics in major economies, although challenges such as high government debt levels and geopolitical tensions persisted.

As inflation approached pre-pandemic levels by late 2023, some developed and emerging market economies still struggled to reach target levels. Despite these inflationary challenges, global economic growth remained robust, surpassing earlier forecasts. The United States and several emerging market economies notably outperformed expectations, driven by strong private consumption and government spending.

However, disparities existed among regions, with the euro area displaying weaker growth due to subdued consumer sentiment and high energy prices. Additionally, lower-income countries faced higher-than-expected inflation and slower growth, attributed to factors like currency depreciation which filtered into the real economy via higher costs for imported goods such as fuel, food and fertilizers.

The global economy’s resilience was supported by post-pandemic supply-side expansions, including a rise in the labour force and increased business investment in response to growing demand. Notably, some economies saw a surge in migrant labour force participation, while others, like China, faced broader labour market weakness.

Furthermore, improvements in supply chain logistics and a decline in transportation costs contributed to economic stability, despite disruptions from events like attacks on commercial shipping and climate-related challenges in key trade routes. Energy prices also fell faster than anticipated, driven by increased oil and natural gas production, particularly in non-OPEC countries like the United States, as well as expanded Russian oil exports.

Since 2022, the decrease in headline inflation primarily stems from diminishing relative price shocks, notably in energy, and reduced core inflation. This decline in energy prices is attributed to increased global supply and tight monetary policies, synchronously implemented by major central banks. Core inflation has decreased due to the waning effects of past headline inflation shocks and easing labour market pressures. Near-term inflation expectations have approached target levels globally, yet financial-market-based measures in the US show a slight increase.

Despite tight labour markets, nominal wage growth has been contained, particularly in the euro area, leading to stagnant or slightly decreased real wages. Wage-price spirals have not materialized, though wages at the lower end of the distribution have risen faster, compressing wage differentials. Factors reducing core inflation differ across major economies, with the US experiencing upward pressure due to labour market tightness and strong macroeconomic conditions. Conversely, the euro area and UK have seen larger roles played by the rapid fading of past relative price movements and pre-pandemic labour market tightness, respectively. IMF estimates reveal positive output gaps in the US and negative gaps in the euro area and UK for 2023.

To combat rising inflation, major central banks have raised policy interest rates to restrictive levels. This has led to increased mortgage costs and tighter credit availability, impacting firms’ ability to refinance debt, causing corporate bankruptcies, and dampening business and residential investment. The commercial real estate sector, particularly office markets, is facing significant pressure due to higher borrowing costs and the shift to remote work. Despite these challenges, a global economic downturn resulting from the rate hikes has not materialized for several reasons. Some central banks adjusted nominal interest rates after inflation expectations rose, resulting in lower real rates initially supporting economic activity. Additionally, households in major advanced economies could rely on pandemic savings to mitigate the impact of higher borrowing costs. Changes in mortgage and housing markets over the pre-pandemic decade, such as increased fixed-rate mortgages, have also moderated the immediate impact of rate hikes on household consumption. However, the cooling effects of high policy rates are becoming more pronounced, leading to mortgage resets and declining pandemic savings availability. Nonetheless, with inflation nearing targets, expectations of lower interest rates in advanced economies have eased financial conditions globally, prompting increased asset appetite in emerging markets and reduced sovereign spreads on government debt. As a result, more governments are accessing international debt markets to alleviate funding shortages.

Looking ahead, the pace of economic expansion is expected to remain modest by historical standards, influenced by several factors such as the long-term impacts of the COVID-19 pandemic, geopolitical tensions like Russia’s invasion of Ukraine, weak productivity growth, and increasing geoeconomic fragmentation. Additionally, the tightening of fiscal policies to address high government debt levels, including higher taxes and reduced government spending, is anticipated to dampen growth prospects.

The latest projections indicate continued global economic growth at a pace similar to that of 2023, expected to persist throughout 2024–25. Although the global growth forecast remains largely unchanged since the January 2024 World Economic Outlook (WEO) Update, there have been some adjustments for major economies.

The United States is projected to experience a further strengthening, with growth expected to increase to 2.7% in 2024 before slowing to 1.9% in 2025 due to gradual fiscal tightening and labour market softening. This represents an upward revision of 0.6 percentage points from the January 2024 WEO Update.

Conversely, the euro area is forecasted to recover from a low growth rate of 0.4% in 2023 to 0.8% in 2024 and 1.5% in 2025, driven by stronger household consumption as energy price shocks subside. However, Germany’s growth outlook has been revised downward by 0.3 percentage points for both 2024 and 2025 due to persistently weak consumer sentiment.

In the United Kingdom, growth is projected to rise from 0.1% in 2023 to 0.5% in 2024 and 1.5% in 2025, supported by easing financial conditions and recovering real incomes as disinflation occurs. Japan’s output is expected to slow from 1.9% in 2023 to 0.9% in 2024 and 1% in 2025 due to the fading of one-off factors that supported growth in 2023.

These projections reflect a global economic landscape characterized by restrictive monetary policies, withdrawal of fiscal support, and low underlying productivity growth, contributing to growth rates below historical averages. Despite these challenges, the forecast for global growth in 2024 and 2025 remains higher than that of the October 2023 WEO, with emerging market and developing economies expected to experience stable growth, albeit with regional differences.