Ahead of the International Monetary Fund’s (IMF) upcoming World Economic Outlook, which will be released next Tuesday during the annual meetings of the IMF and the World Bank, Managing Director Kristalina Georgieva has delivered a surprisingly upbeat assessment of the world economy.
Speaking at an event hosted by the Milken Institute in Washington, the IMF head said the world economy has proven more resilient than expected despite acute strains from multiple shocks.
“How is the world economy coping? Short answer: better than feared, but worse than we need,” said Georgieva.
“When we met in April, many experts—not us—predicted a US recession in the near term, with negative spillovers to the rest of the world. Instead, the US economy, as well as many other advanced and emerging markets, and some developing countries, have held up.
“As our World Economic Outlook will explain next week, we see global growth slowing only slightly this year and next. All signs point to a world economy that has generally withstood acute strains from multiple shocks.”
Georgieva said the resilience was down to four factors…
Improved policy fundamentals: In many parts of the world, sustained efforts have delivered more credible monetary policy, deeper local currency bond markets, new fiscal rules, and—during the pandemic—swift, decisive, and globally coordinated fiscal action to limit the immediate pain and the lasting scars.
Private sector adaptability: Corporate balance sheets of the private sector are generally strong after years of robust profits, reflexes are quick after the dry runs of shock after shock, artificial intelligence is becoming mainstream, and change is faced as a challenge and embraced as an opportunity.
Less severe tariff outcomes than initially feared: The shock has not been as large as initially announced. The US trade-weighted tariff rate has fallen from 23 per cent in April to 17.5 per cent now—still much higher than before. The US effective rate is now far above the rest of the world’s, which has held relatively steady this year, with very few cases of retaliation. The world has avoided a tit-for-tat slide into trade war – so far.
Supportive financial conditions: Fired up by optimism about the productivity-enhancing potential of AI, global equity prices are surging. This, plus tight risk spreads, leaves funding markets generally wide open – and the dollar’s slide earlier this year gives precious relief to non-US borrowers with dollar-denominated debt.
Georgieva said the IMF was forecasting global growth of roughly 3 per cent over the medium-term, well below the 3.7 per cent forecast before the COVID-19 pandemic.
Uncertainty is at exceptionally high levels and continuing to climb, while demand for gold – a traditional safe-haven asset – is surging, she added.
“Buckle up. Uncertainty is the new normal and it is here to stay,” the IMF chief said, added.
India, a driver of growth
Pointing out India as a “key growth engine”, Georgieva said in this world of rapid change, it is “paramount that policymakers do much more to capture and deliver opportunity so they can meet the aspirations of their citizens, especially young people”.
She said IMF proposes three medium-term policy goals:
“First, to durably lift growth, so the economy can create more jobs, more public revenue, and better public and private debt sustainability,” she explained.
“Second, to repair governments’ finances, so they can buffer new shocks and attend to pressing needs without driving up private sector borrowing rates.
“And third, to address excessive imbalances, both domestic and external, so they do not emerge as a spoiler.”
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