Has receding inflation pushed global slowdown fears to the sidelines?

Finance Minister Nirmala Sitharaman recently expressed confidence in India’s economic trajectory

The global fight against inflation has largely been won, declared the International Monetary Fund recently. After years of relentless price increases triggered by the pandemic, the recent cooling of inflation signals improving economic stability. Countries such as India, the United States, China, and Taiwan are projected to experience stronger growth in the coming months and into 2025, according to Bloomberg estimates.

India’s gross domestic product (GDP) is forecasted to grow at 7 percent in 2024 and 6.6 percent in 2025. While these figures reflect a slight deceleration from the 8.2 percent growth recorded last year, they continue to remain robust. The slower pace is attributed to the tapering of post-pandemic consumer spending. Despite this moderation, India stands out as the fastest-growing major economy, with its projected growth rates for both 2024 and 2025 outpacing those of other countries.

In comparison, the US economy is expected to grow at 2.6 percent in 2024 and 1.8 percent in 2025. China’s GDP is projected to expand by 4.8 percent in 2024 and 4.5 percent in 2025.

On the inflation front, India’s consumer price index (CPI)-based inflation is forecast to average 4.5 percent in 2024 and ease further to 4.4 percent in 2025, according to Bloomberg data. This projection comes after retail inflation surged to 5.5 percent in September 2024, a nine-month high, temporarily breaching the Reserve Bank of India’s (RBI) target of 4 percent. Analysts believe the recent spike in food prices is a transient issue, with stabilisation expected in the coming months.

The RBI's Monetary Policy Committee (MPC) has adopted a neutral stance, prioritising inflation control while avoiding aggressive rate actions. The bank's cautious policy reflects a low tolerance for temporary inflation spikes, especially in light of the Federal Reserve's recent rate cut, which has eased global monetary pressures.

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In the US, inflation is forecast to average 2.9 percent in 2024 before easing to 2.2 percent in 2025, aligning with the Federal Reserve’s long-term inflation target. This decline supports the view that fears of an economic slowdown have diminished.

The surge in inflation began as the world economy rebounded more quickly than expected from the COVID-19-induced recession. Central banks around the world, including the Federal Reserve and the RBI, responded by raising interest rates to curb inflation. These high borrowing costs, combined with the resolution of supply chain disruptions, have now driven inflation sharply down from the multi-decade highs seen in mid-2022.

The successful reduction of inflation without triggering a global recession marks a significant achievement. Economists suggest that this stabilisation could drive renewed economic growth, as businesses and consumers regain confidence. With inflation receding, the focus now shifts towards sustaining growth momentum while balancing inflationary risks in the long term.

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