IMF warning: “The world is heading for the worst economic period in the last 30 years”
IMF Director Kristalina Georgieva in Davos
Kristalina Georgieva, the managing director of the IMF, has warned that the world economy will face years of slow growth and that the medium-term outlook is the weakest in the last 30 years, writes the Financial Times. The head of the IMF said that the world economy will expand at an average annual rate of about 3% over the next five years. The figure is well below the average forecast of 3.8% over the past two decades and marks the weakest medium-term growth projection since 1990. In the decades since then, globalization has helped to increase growth rates and lift hundreds of millions of people out of poverty. However, given that trade protectionism is on the rise, the pace of global economic expansion is expected to slow. Highlighting a likely theme of next week’s meetings, the IMF managing director said the main obstacles to growth are growing economic fragmentation and geopolitical tensions. “This calamity not only kills innocent people but also worsens the cost of living crisis and brings more hunger around the world. It risks erasing the dividends of peace we have enjoyed over the past three decades, as well as causing disruptions in trade and finance,” said Kristalina Georgieva, referring to Russia’s invasion of Ukraine.
“The path back to robust growth is bumpy and hard to find, and the ties that hold us together seem weaker now than they were just a few years ago,” Georgieva added, according to the Financial Times, quoted by Business Magazine. The weaker outlook would make it “even more difficult to reduce poverty, heal the economic scars of the COVID crisis, and provide new and better opportunities for all”. For the coming quarters, the IMF supports the calls of the OECD and other international organizations for central banks to maintain high interest rates. Georgieva stated that defeating inflation is a vital basis for better economic performance in the medium term. “The failure of Silicon Valley Bank and Credit Suisse exposed failures in risk management at certain banks, as well as supervisory deficiencies,” she said, but added that “policymakers were remarkably quick and comprehensive in their actions in recent weeks”. Additional financial instability should be addressed by central banks providing large amounts of liquidity to banks facing funding difficulties. However, if the turbulence worsens, the banking authorities may have to give up this position and reduce the rates. If this were to happen, central banks would face difficult trade-offs between their inflation and financial stability objectives, as well as the use of those instruments. Georgieva indicated that the IMF’s latest growth forecasts, published next week, will be little changed compared to January.
By Roberto Caseli
