By Matt Grossman
The International Monetary Fund is doubling down on its forecast that the American economy will outpace other big Western countries this year, a path that would cap a remarkable U.S. recovery from the pandemic and a bout of high inflation.
The U.N. financial agency raised its estimate for full-year U.S. growth in 2025 to 2.7%, up from 2.2% in the previous round of projections from October. Meanwhile, growth expectations for big European economies such as Germany's, France's and Italy's were all downgraded, as was Canada's.
The estimates underscore a potent formula that has powered the U.S. economy through a turbulent global backdrop: a stretch of strong productivity growth, a labor market that has softened but stayed resilient, and a largely effective policy response to rising prices from the Federal Reserve.
The IMF projects that American gross domestic product expanded by 2.8% in 2024, after rising by 2.9% a year earlier. That vastly outpaced the eurozone, which likely recorded a 0.8% growth rate last year.
The divergence has come as U.S. inflation has fallen from a peak 12-month rate of around 9% in 2022 to less than 3% by the end of last year.
Outside the U.S., the West's major economies are dealing with a patchwork of challenges. In Europe, countries such as France and Germany have faced an energy crisis that followed the outbreak of war in Ukraine, and manufacturers, especially in the car industry, are contending with an influx of Chinese imports.
Businesses in the U.K. are girding for higher taxes as financial markets exert pressure on the government to discipline its spending.
In Canada, weaker natural gas prices have hit the country's important energy sector. As in the U.S., the labor market cooled through 2024, but from a weaker starting place. Canada's estimated 2024 growth was 1.3%, according to the IMF.
In addition to regional setbacks, these economies have also been largely passed over by notable growth in U.S. labor productivity, a trend that promotes low-inflation growth and that American economists are still working to understand fully.
Often, global growth rates vary because countries find themselves in booms and busts at different times, Pierre-Olivier Gourinchas, the IMF's chief economist, wrote in a blog post on Friday. But more and more, the split between the U.S. and Europe looks like something different: evidence of structural divergence between the regions that could push the U.S. even farther ahead, he wrote.
"Over time, this translates into higher returns on U.S. investment, increased inbound capital flows, a stronger dollar and U.S. living standards pulling away from those of other advanced economies," Gourinchas wrote.
Compared with the U.S., Europe's most important challenges include a less advanced tech sector and less sophisticated financial markets, Gourinchas wrote.
Policy uncertainty means the figures will be contingent on choices by the incoming Trump administration and the new Congress on major economic issues such as trade, immigration and taxes. The IMF's forecasts only account for laws already on the books, so the sweeping changes that Trump has promised could throw the projections off course.
Zooming out, the global economy as a whole might start to look more normal this year, the IMF projections suggest. Global inflation-adjusted growth is projected to stay steady at 3.3% both this year and next. The agency thinks that inflation around the world could fall to 4.2% in 2025, from 5.7% last year--and fall farther to 3.5% in 2026.
Cooler inflation should generally allow global central banks to ease interest rates down toward more neutral levels, putting the worldwide economy closer to an equilibrium, the IMF said.
"This will help draw to a close the global disruptions of recent years, including the pandemic and Russia's invasion of Ukraine, which precipitated the largest inflation surge in four decades," Gourinchas wrote.
The IMF sees China's full-year growth roughly in line with other emerging markets next year, at 4.6%. But the agency warned that the country could fall into a deflationary trap if fiscal and monetary stimulus aren't strong enough to boost the country's economy.
Write to Matt Grossman at matt.grossman@wsj.com.
(END) Dow Jones Newswires
01-17-25 0915ET
