US Economy Cools Down, Europe Heats Up: International Monetary Fund Flags Sticky Inflation, Worrisome National Debt

The International Monetary Fund (IMF) revised its projected economic growth for the U.S. in 2024, lowering it to 2.6%.

What Happened: The revision is 0.1 percentage points below the agency’s April projection.

The IMF cited a slower-than-expected start to the year and an anticipated cooling in the labor market as reasons for slower GDP growth.

The IMF also expects GDP growth to slow in 2025 to 1.9%, as the labor market continues to cool and consumption moderates. Fiscal policy will tighten gradually. By the end of 2025, growth should align with potential output, closing the positive output gap, according to the IMF.

The April 2024 WEO noted first-quarter growth surprises in many countries, though the U.S. and Japan saw notable downside deviations. In the U.S., a sharper-than-expected slowdown was attributed to moderating consumption and negative contributions from net trade.

“The United States shows increasing signs of cooling, especially in the labor market, after a strong 2023. The euro area, meanwhile, is poised to pick up after a nearly flat performance last year,” said Pierre-Olivier Gourinchas, IMF Director of Research.

Global growth projections remain aligned with the April 2024 WEO forecast, at 3.2% for 2024 and 3.3% for 2025, with the latter receiving an upward revision of 0.1 percentage points.

Spain and Turkey saw the largest upward revisions for 2024, with increases of 0.5 percentage points each, while Kazakhstan’s growth forecast was adjusted upward by 0.4 percentage points.

Conversely, Saudi Arabia, Argentina, and Egypt experienced the sharpest downward revisions, at 0.9, 0.7, and 0.3 percentage points, respectively.

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Why It Matters: The fight against inflation is not over, the IMF warns.

Global inflation is projected to slow to 5.9% this year, down from 6.7% last year, indicating progress towards a soft landing.

However, disinflation progress has stalled in some advanced economies. This is particularly the case in the U.S., where services inflation remains stubbornly high and complicates monetary policy normalization.

“Progress on disinflation has slowed in the United States, raising upside risks to inflation,” the report states. This persistent services inflation is delaying policy normalization and increasing the likelihood of prolonged higher interest rates amid escalating trade tensions and policy uncertainty.

The IMF also expresses concern over the U.S.’s fiscal stance. Despite full employment, the U.S. continues to push the debt-to-GDP ratio higher, with risks to both the domestic and global economy.

“Fiscal challenges need to be tackled more directly,” Gourinchas said. “The increasing U.S. reliance on short-term funding is also worrisome.”

With higher debt, slower growth, and larger deficits, debt trajectories could become unsustainable if government bond spreads increase, posing significant risks to financial stability.

In April, the Washington-based financial institution predicted that U.S. government deficits would remain above 6% for the remainder of the decade, with the debt-to-GDP ratio projected to increase from 122.1% to 133.9%.

<figure class="wp-block-table is-style-stripes">

Year	Government Deficit (As % of GDP)	Government Debt As % of GDP
2023	-8.8	122.1
2024	-6.5	123.3
2025	-7.1	126.6
2026	-6.6	128.9
2027	-6.2	130.7
2028	-6.4	132.6
2029	-6	133.9

<figcaption class="wp-element-caption">Data: IMF Fiscal Monitor ? April 2024</figcaption></figure>

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