Charts of the Week: Revisions, Risks, Reforms, Repeat

The IMF’s Economic Outlook The IMF expects global growth to remain broadly flat – decelerating marginally from 3.3% y/y in 2023 to 3.2% in both 2024 and 2025. This outlook is largely unchanged from the forecasts that were published in April 2024 and October 2023. But there were some nuances beneath the surface, with upward revisions to the outlook for the US offset by downward revisions to the euro area, and to Germany in particular, in 2025.

Policy Uncertainty The IMF’s relative optimism about the outlook for the US and the pessimism about Germany can be traced to a number of factors, though the latter’s high energy costs along with the plight of its manufacturing sector - and its auto sector in particular - have been key. These have combined to generate very high levels of policy uncertainty in Germany relative to its European peers and particularly compared to the US (see chart 2).

Global trade Weak global demand, particularly from key markets like China, has also hit Germany’s economy. And this week’s latest data from South Korea have additionally underscored the fragility of that demand. For instance export growth in the first 20 days of October slowed to a 14 month low of -4.2% y/y on a working-day adjusted basis after +3.1% in September. PPI inflation also weakened, to 0.9%y/y in September from 1.6% in the previous month.

The Energy Transition (and the UK) There are a number of downside risks to the outlook that the IMF – and other economic forecasters – have been citing in recent months. One of the most critical is climate change and the energy transition and how this is amplifying instability in energy and food markets. Ahead of next week’s Budget announcement from the new Labour government, there has been an active debate about the provision of electricity, amidst a dearth of public investment in nuclear energy sources. This is notwithstanding a relatively impressive shift away from fossil fuels toward more sustainable renewable energy sources over the past few years (see chart 4).

The Policy Mix How policymakers now calibrate both monetary and fiscal policy will also clearly be key for the evolution of the broader world economy and financial markets in the period ahead. As the IMF additionally noted in its latest report, monetary policy has tightened considerably over the past two years and with respect to current levels of real policy rates, remains restrictive at present (with the notable exception of Japan). When measured with reference to shifts in cyclically-adjusted primary balances, fiscal policy is also now a little tighter in most major economies compared with two years ago.

Structural Reforms Supply side rigidities stemming from reform fatigue, lacklustre investment and broader global challenges (including climate change) are additional threats to global economic stability. On the reform front it is certainly of note that Infrastructure Ratings from the Economist Intelligence Unit for several major advanced economies have, on the whole, declined over the past 10 years, albeit from a relatively high base. And even in fast growing developing economies, those ratings have also often either declined a little (e.g. for China) or edged only marginally higher (e.g. for India) even though the underlying base of these ratings is usually much weaker.