IMF/World Bank annual meetings: a postcard from Marrakech

Global economic growth has been resilient, but the outlook is fragile and many potential non-linear risks prevail. Inflation risks, monetary policy effectiveness, elevated debt levels and geopolitical tensions all featured prominently at the IMF/World Bank Annual Meetings in Morocco. We share many of the concerns, and overall see more down- than upside risks for the global economy in the short- to medium term.

Key takeaways

• IMF/World Bank annual meetings conveyed a sombre mood: the global economy is fragile and faces a swath of potential non-linear risks.
• Inflation: the last mile is the hardest and a 1970s stagflation repeat could be closer than many think.
• Monetary policy and US bond market: puzzled nervousness.
• Debt levels, emerging market debt distress and net zero ambitions: precarious situations.
• Geopolitical risks: acknowledged but not priced in.

The Annual Meetings of the International Monetary Fund, The World Bank and The Institute of International Finance in Morocco conveyed a sombre mood on the global economy. Although the IMF revised up its growth forecasts for next year, it did so for inflation also. At 5.8%, it now expects global inflation in 2024 to be almost 1 percentage point higher than it had forecast in April. This is a substantial change and reaffirms that while there has been progress on disinflation this year, the inflation crisis is far from resolved. As a result, at the meeting the IMF and also many central banks reiterated their message that policy rates will remain "high for longer". Our inflation forecasts for the US and euro area next year are lower than both the consensus and IMF projections, but this is mostly due to our expectations on growth and being much more conservative. The latter is based on our expectation that the sharpest monetary tightening cycle of the past 50 years will constrain growth, which in turn will help keep inflation on its path lower.

Summary of economic growth and inflation forecasts

Besides point forecasts, the meetings' discussions revolved around the extreme levels of uncertainty with regards to the economic outlook, the inflation and bond market trajectory, and also geopolitics. We highlight the main points of these topics below.

Inflation: the last mile is the hardest and a 1970s stagflation repeat could be closer than many think. We and the consensus expect the disinflation process in advanced economies to continue. But there is near-universal agreement that there will be no swift return of inflation to 2%. In our view, inflation will be structurally and hover between 2.5-3% on average this decade. Should the world face another external shock, be the through higher commodity prices or other, the elevated starting level of inflation today raises the likelihood of a repeat of the stagflation environment seen in the 1970s.

Monetary policy and US bond market: puzzled nervousness. Policy makers appear puzzled by the lagged effects of monetary policy and the recent increase in longer-dated government bond yields. We have also been surprised by the US economic and labour market resilience so far, but we flagged recently, the increase in longer-dated US government bond yields has been primarily driven by financial markets' assessment of a higher nominal neutral rate.¹ That said, the rise in the term premium² probably also reflects the enormous increase in government bond supply, and potential fiscal concerns given expected US budget deficits of 5% or more over the coming years. Ultimately, however, we believe higher long-term yields are self-defeating, since abrupt rises in yields raise the likelihood of a recession.

Debt, emerging market debt distress and net-zero ambitions: precarious situations. The IMF highlighted that almost half of all emerging market and developing economies (EMDEs) are in or at a high risk of debt distress, while at the same time needing to spend more on climate mitigation. Given very elevated global government debt levels, it seems clear that more private-sector capital involvement is needed make net zero happen. Given higher interest rates, however, this will require more prioritisation on how public and private capital is invested.

Geopolitical risks: acknowledged but not priced in. Geopolitics risks featured prominently in many discussions. Whilst acknowledged in the policy domain, financial markets have not fully priced in the risks. The hope is that geopolitical tensions will eventually abate. If they don't, financial markets will remain vulnerable to a repricing of such risks.

The bottom line: many risks are known by now, but the global economy is in a fragile situation given a swath of potential non-linear risks. Many advanced economies have shown surprising resilience of late, but we do not expect this to last and see instead a significant economic slowdown next year.