IMF chief sees ‘darkening’ outlook for international financial system

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The International Monetary Fund (IMF) will subsequent week downgrade its forecast for two.9 p.c international progress in 2023, Managing Director Kristalina Georgieva mentioned on Thursday, citing rising dangers of recession and monetary instability.

Georgieva mentioned the outlook for the worldwide financial system was “darkening” given the shocks brought on by the COVID-19 pandemic, Russia’s invasion of Ukraine and local weather disasters on all continents, and it might effectively worsen.

“We are experiencing a fundamental shift in the global economy, from a world of relative predictability … to a world with more fragility — greater uncertainty, higher economic volatility, geopolitical confrontations, and more frequent and devastating natural disasters,” she mentioned in a speech at Georgetown University in Washington, DC.

Georgieva mentioned the outdated order, characterised by adherence to international rules, low rates of interest and low inflation, was giving strategy to one wherein “any country can be thrown off course more easily and more often.”

She mentioned the entire world’s largest economies — China, the United States and Europe — have been now slowing down, which was dampening demand for exports from rising and growing international locations, already hit laborious by excessive meals and power costs.

The IMF would decrease its 2023 progress forecast from 2.9 p.c, its fourth downward revision this 12 months, when it releases its World Economic Outlook subsequent week, she mentioned. The international lender would go away its present forecast for 3.2 p.c progress in 2022 unchanged, she mentioned and gave no quantity for the brand new 2023 forecast.

The warfare in Ukraine and international financial dangers will dominate subsequent week’s annual conferences of the IMF and the World Bank in Washington, DC, which carry collectively finance ministers and central bankers from world wide.

The IMF estimates international locations accounting for about one-third of the world financial system will see not less than two consecutive quarters of contraction this 12 months or subsequent, Georgieva mentioned.

“And, even when growth is positive, it will feel like a recession because of shrinking real incomes and rising prices,” she mentioned.

Overall, the IMF expects international output to shrink by $four trillion between now and 2026. That is roughly the scale of the German financial system and quantities to a “massive setback,” she added.

Global divisions

Georgieva mentioned the division of the worldwide financial system into blocs which might be both supporting Russia, opposing it, or “sitting on the bench” following its invasion of Ukraine would wind up lowering vital efficiencies and hurting poor folks probably the most.

“We cannot afford the world to break apart,” she mentioned. “If we go to a point where we cut off parts of the world from each other, it will be the poor in rich countries and it will be the poor countries that will bear the brunt of the impact of it.”

Uncertainty remained excessive and extra financial shocks have been potential, she mentioned, warning that top debt ranges and liquidity issues might amplify the speedy and disorderly repricing of belongings on monetary markets.

Georgieva mentioned inflation remained stubbornly excessive, however central banks ought to proceed to reply decisively, even when the financial system slowed down.

A Customer Shops In A Grocery Store During A Power Cut In Beirut, Lebanon
Inflation is stubbornly excessive, however central banks ought to proceed to reply decisively, the International Monetary Fund mentioned on Thursday[File: Francesca Volpi/Bloomberg]

She instructed CNBC in an interview that US Federal Reserve Chair Jerome Powell was strolling a “very, very narrow” path in shaping financial coverage, however the IMF anticipated rates of interest to be “somewhere in the 4 percent territory” in 2022 and 2023.

“If he doesn’t tighten enough, inflation may de-anchor. If he tightens too much, there could be a recession. So Jay Powell is doing his best to watch the parameters in the economy to calibrate what he does, and I trust that he will make the right call,” she mentioned.

Fiscal measures adopted in response to excessive power costs needs to be focused and non permanent, she mentioned within the speech.

“In other words, while monetary policy is hitting the brakes, you shouldn’t have a fiscal policy that is stepping on the accelerator. This would make for a very rough and dangerous ride.”

The United Kingdom this week reversed plans to chop taxes for the richest, which had sparked market turmoil and a pointy rebuke from the IMF, that warned the nation’s monetary plans risked rising inequality and have been at cross functions with tightening financial coverage.

Asked on CNBC concerning the IMF’s criticism of UK coverage, Georgieva mentioned, “This is a message we convey to everybody.”

Georgieva urged higher assist for rising markets and growing international locations, noting that top rates of interest in superior economies and the robust greenback had triggered capital outflows. The likelihood of portfolio outflows had risen to 40 p.c.

She additionally referred to as on China and personal collectors — who maintain the lion’s share of world debt — to deal with the chance of a widening debt disaster in rising markets.

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