The post-pandemic cycle of the global economy is coming to an end, according to IMF economists. A new cycle is beginning, characterized by a divergence in economic growth and inflation between the world’s largest economies: the US on the one hand, and Europe and China on the other.
The IMF has updated its economic forecast, stating that global economic growth rates over the next three years will be in line with potential, while global inflation is slowing steadily, approaching the pre-pandemic trend and central bank targets.
According to the forecast, global GDP growth in 2025 and 2026 will be 3.3%, which is still below the 2000–2019 average of 3.7%.
Global inflation will slow to 4.2% this year and to 3.5% in 2026, compared with an average of 3.1% in the pre-pandemic years of 2015–2019.
Compared to the October and January versions of last year, this forecast, updated by the IMF at the end of last week, has remained virtually unchanged (GDP growth in 2025 was forecast last year at 3.2%, inflation at 4.3–4.4%).
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“This is the end of a cycle and the beginning of the next,” IMF economic adviser Pierre-Olivier Gourinchas comments in a video review. A distinctive feature of the new cycle is the widening divergence between the world’s largest economies, he points out.
While economic growth in the US, supported by strong domestic demand, is exceeding expectations, Europe is facing sluggish growth, partly due to persistently high energy prices, and China is showing a “rather sluggish” recovery. The growth forecast for the US economy in 2025 has been raised by almost a quarter to 2.7%, for China from 4.5% to 4.6%, and for the eurozone it has been lowered to 1% (from 1.2%).
At the same time, the US economy is growing above its potential, while Europe and China are growing below it. This is a cyclical divergence that could be temporary and gradually disappear.
However, there are also structural divergences between the largest economies that will keep the gap open: the growth potential of the US has increased, while that of Europe and China has declined compared to the pre-pandemic period.
The increase in US potential growth is driven by stronger productivity growth, including in the technology sector, which is linked to a more favorable business climate and deeper capital markets.
Over time, this leads to higher returns on US investments, increased capital inflows, a stronger dollar, and faster growth in living standards in the US compared to other advanced economies, Gurinchas explains.
For China, it is noteworthy that current potential growth has become close to that of other emerging economies, although it was previously significantly higher.
For Europe: a further slowdown in growth if energy prices remain high and investors remain concerned about the sustainability of public debt.
The eurozone’s monetary and fiscal policies could simultaneously exhaust the scope for supporting the economy if weaker economic activity pushes interest rates back toward the effective lower bound and insufficient fiscal consolidation increases risk premia, further constraining fiscal policy.