Stubbornly high inflation in the services sector could keep interest rates higher for longer, the International Monetary Fund (IMF) has warned.
In its latest assessment of the global economy, the Washington-based fund said “the momentum on global disinflation is slowing, signalling bumps along the path”.
“This reflects different sectoral dynamics: the persistence of higher-than-average inflation in services prices, tempered to some extent by stronger disinflation in the prices of goods,” it said.
The higher rate of price growth in services was linked to wage growth as workers seek a “catch-up of real wages” after a period of high inflation. Wages tend to account for a bigger share of costs in services-related businesses as they typically employ more staff.
Despite reducing interest rates last month, European Central Bank (ECB) policymakers warned elevated levels of inflation in the services sector linked to wage growth could limit further rate reductions. They are not expected to cut rates further when they meet this week.
“Further challenges to disinflation in advanced economies could force central banks, including the Federal Reserve, to keep borrowing costs higher for even longer,” IMF chief economist Pierre-Olivier Gourinchas said in a blog accompanying the report.
“That would put overall growth at risk, with increased upward pressure on the dollar and harmful spillovers to emerging and developing economies,” he said.
In its report, the IMF also cautioned that the escalation of global trade tensions could further raise near-term risks to inflation by increasing the cost of imported goods along the supply chain. Cross-border trade restrictions have surged “harming trade between geopolitically distant bloc”, it said.
US presidential hopeful Donald Trump has made no secret of the fact that he plans to build a wall or “a ring” of tariffs around the US economy if elected.
The IMF maintained a projection for global growth of 3.2 per cent this year and 3.3 per cent next year.
“Global activity and world trade firmed up at the turn of the year, with trade spurred by strong exports from Asia, particularly in the technology sector,” it said.
While global growth in many countries and regions surprised on the upside in the first quarter, it noted there “downside surprises” in the US and Japan.
“In the United States, after a sustained period of strong outperformance, a sharper-than-expected slowdown in growth reflected moderating consumption and a negative contribution from net trade,” it said.
“In contrast, shoots of economic recovery materialised in Europe, led by an improvement in services activity,” the fund said.
It expects the euro zone economy to grow by a modest 0.9 per cent in 2024 (an upward revision of 0.1 percentage point), driven by stronger momentum in services and higher-than-expected net exports in the first half of the year.
Growth is projected to rise to 1.5 per cent in 2025 on the back of stronger consumption linked to rising real wages.
In the US, projected growth was revised down to 2.6 per cent this year reflecting the slower-than-expected start to the year, slowing to 1.9 per cent in 2025 as “the labour market cools and consumption moderates”.
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