The global fight against inflation “has been largely won” without triggering a significant economic downturn, says International Monetary Fund (IMF) chief economist Pierre-Olivier Gourinchas.

IMF officials published the October edition of the World Economic Outlook, forecasting that headline inflation will cool to 3.5 percent by the end of next year, slightly below the two-decade average before the pandemic.

Lowering inflation while averting a global recession has been “a major achievement,” Gourinchas noted. Therefore, because inflation is inching closer to advanced economies’ 2 percent target, major central banks now can pursue monetary easing.

The IMF chief economist said that while much of the disinflation has been attributed to the unwinding of the supply and demand shocks and improvements in labor supply, monetary policy has also “played a decisive role in keeping inflation expectations anchored.”

Global real GDP growth is projected to be 3.2 percent in 2024 and 2025.

In the United States, economic output is anticipated to be 2.8 percent this year and 2.2 percent next year. This is an upgrade from the July outlook of 2.6 percent (2024) and 1.9 percent (2025), listing solid consumption as a chief reason for the upward revision.

Canada is expected to lead advanced economies, with a projected real GDP growth rate of 2.4 percent in 2025.

Across the Atlantic, the struggling eurozone and UK economies will expand by 1.2 percent and 1.5 percent next year, respectively.

Emerging markets and developing economies, which registered solid growth rates in 2023, are expected to cool down heading into the new year. China is forecast to decelerate to 4.5 percent in 2025 from 4.8 percent this year, and India’s growth is also anticipated to cool down to 6.5 percent from 7 percent.

Despite the positive news on the inflation front, Gourinchas warned of growing downside risks, including escalating geopolitical tensions, undesirable trade and industrial policies, and falling migration in developed markets. This, the IMF stated, could renew spikes in energy and food prices due to supply shocks.

Since Iran launched a barrage of ballistic missile attacks against Israel earlier this month, the world has braced for the country’s retaliation.

The global lender flagged possible tariffs and tit-for-tat retaliation that could ignite international strife.

Tariffs and immigration are key issues in the coming U.S. election. Trump has proposed instituting across-the-board 10 percent tariffs and higher levies on Chinese imports. The Republican presidential candidate also vowed to deport millions of illegal immigrants and ensure people come into the country legally.

Critics said these policies could rekindle inflation and affect economic growth prospects.

To mitigate potential economic fallout from these trends, the IMF recommended policymakers “implement a policy triple pivot.” This involves easing monetary policy, stabilizing governments’ fiscal health, and employing economic reforms.

“This is the only way we can address many of the challenges we face,” Gourinchas said.

Global Debt ‘Is Probably Worse Than It Looks’

Current fiscal efforts have resulted in mounting government debt that has been “a consequence of still-expansionary fiscal policies” in countries worldwide, the IMF said in its latest Global Financial Stability Report.

At the same time, the IMF notes that an abrupt shift toward fiscal tightening “could hurt economic activity.”

“Governments in advanced economies and major markets have ample room to adjust the fiscal situation going forward through spending measures, through revenue measures,” said Tobias Adrian, the IMF’s financial counselor and director of the monetary and capital markets department.

According to the latest fiscal monitoring report, global government bond markets could endure “bouts of volatility” as more central banks trim their bond holdings and governments fund their spending through bond issuance.

The U.S. Treasury Department has flooded capital markets with bonds, particularly short-term debt securities. This could lead to lower borrowing costs in the near term “but could also expose the Treasury to higher future financing costs.”

Bond yields have been rocketing while the Fed and other central banks have launched an easing cycle of lower interest rates.

The benchmark 10-year yield touched 4.2 percent during the Oct. 22 trading session, rising more than 50 basis points since the Federal Reserve fired off a jumbo half-point rate cut. The two-year yield firmed above 4 percent while the 30-year bond eyed 4.5 percent.

Similar trends were observed elsewhere, including in the United Kingdom, Germany, France, and Italy.

Moving forward, Adrian says, the trajectory of yields is about how far these institutions’ balance sheet normalization “is going to go.”

“I would say that this balance sheet normalization has proceeded in a satisfactory and very orderly manner,” Adrian told reporters at a separate IMF press briefing.

Since the Fed’s March 2022 tightening campaign, the central bank’s balance sheet has declined by nearly $2 trillion, falling to $7.04 trillion as of Oct. 16.

Last week, the IMF spotlighted concerns surrounding global public debt. Economists forecast it will reach $100 trillion by the year’s end, absorbing 93 percent of world GDP. By 2030, worldwide debt will approach 100 percent of GDP.

The situation “is probably worse than it looks,” referencing immense spending pressures, enormous unidentified debt, and optimism bias of debt projections.

“If public debt is higher than it looks, current fiscal efforts are likely smaller than needed,” the group stated.

The U.S. budget deficit topped $1.8 trillion in fiscal year 2024, with interest costs eating about a quarter of federal revenues. The national debt could top $36 trillion by the end of the year, fueled by soaring mandatory spending (Social Security, Medicare, and income security) and growing interest payments.