GLOBAL ECONOMIC RISKS REMAIN BALANCED BUT…

MBABANE – The International Monetary Fund (IMF) says risks to the world economic outlook (WEO) remain balanced, as in the April 2024 WEO, but some near-term risks have gained prominence.

In the WEO update for July 2024, the international lender stated that these risks include upside risks to inflation that stem from a lack of progress on services disinflation and price pressures emanating from renewed trade or geopolitical tensions. Risks of persistent inflation in the services sector are tied to both wage and price setting, given that labour accounts for a high share of the costs in that sector.

Productivity

Higher nominal wage growth, which in some cases reflects the catch-up of real wages, if accompanied by weak productivity, could make it difficult for firms to moderate price increases, especially when profit margins are already squeezed. This could lead to further stickiness in wage and price inflation. The escalation of trade tensions could further raise near-term risks to inflation by increasing the cost of imported goods along the supply chain.

The IMF added that bumpiness along the remaining disinflation path could destabilise the return to price stability if short-term expectations spike upward as a result of disappointing inflation data.  The risk of elevated inflation has raised the prospects of higher-for-even-longer interest rates, which in turn increases external, fiscal, and financial risks.

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