05/10/2023 – 14:13
Despite heightened fears of recession in developed countries in recent weeks, International Monetary Fund (IMF) Managing Director Kristalina Georgieva said she sees greater chances of the global economy making a soft landing ahead. According to her, the world economy demonstrated “remarkable resilience” and the first half of 2023 brought “good news”, mainly due to a stronger than expected demand for services and “tangible progress” in the fight against inflation.
“This increases the chances of a soft landing for the global economy. But we cannot let our guard down”, warned Georgieva, in her opening speech at the annual meetings of the IMF and the World Bank, at an event in Ivory Coast.
Citing the new economic projections that the IMF is expected to release next week, during the meetings, she admitted that the pace of global expansion remains quite weak, below the average of 3.8% before the pandemic. And global growth prospects in the medium term have weakened further, according to her.
Although the recovery from the shocks of recent years continues, it is slow and uneven, he assessed. “A stronger impulse comes from the United States. India and several other emerging economies, including Ivory Coast, are bright spots,” said Georgieva.
On the other hand, she recalled that most advanced economies are going through a period of economic slowdown. “And in China, economic activity is below expectations and many countries are facing anemic growth”, highlighted the IMF managing director.
She once again warned, however, of the risks surrounding global fragmentation, with countries increasingly acting alone in the wake of recent global shocks, the pandemic and the war in Ukraine. In addition to being a threat to the already weak global growth prospects, the movement is a challenge especially for emerging and developing countries, he highlighted.
“We estimate that the accumulated loss of global production resulting from successive shocks since 2020 will amount to US$3.7 trillion in 2023”, projected Georgieva.
Inflation and effects
The IMF managing director warned of the risk of a sudden resurgence in inflation tightening financial conditions even further, severely impacting markets and economies. Despite the improvement in the cost of living in some countries, many will only be able to converge it back to the central banks’ target in 2025, according to her.
“Fighting inflation is priority number one. Thanks to decisive actions by central banks and responsible fiscal policies, inflation is declining in most countries, but is likely to remain above target for some countries until 2025,” Georgieva emphasized.
It reinforced the discourse of central banks in the United States and Europe that in order to win the fight against inflation, interest rates will have to remain higher for a longer term. “This is essential to avoid premature easing of policy, given the risk of a resurgence of inflation,” said the IMF managing director.
A Fund study published this week shows the growing importance of inflation expectations as a driver of price increases. In it, the organization even praises Brazil’s decision to adopt a continuous inflation target instead of the so-called calendar year, in force since 1999.
Communication from Central Banks
In this context, Georgieva said central banks need to clearly communicate their objectives to help shape people’s views on inflation. She also mentioned her responsibility for maintaining financial stability.
“Expectations of a ‘soft landing’ helped boost several asset prices,” she said. “But a rapid reassessment of these prospects – with the sudden resurgence of inflation – could lead to a sharp tightening of financial conditions, hitting markets and economies hard,” she warned.
Tax scenario
The IMF managing director also drew attention to “significant risks” on the fiscal side. “One-fifth of emerging economies and more than half of low-income countries remain at elevated risk of a debt crisis,” she said.
According to Georgieva, another IMF study shows the importance of improving governance and the State’s capacity to contribute to inclusive economic growth. This analysis points out that a package of reforms focused on reducing bureaucracy, improving governance and reducing trade restrictions could increase the Gross Domestic Product (GDP) of emerging and developing countries by 8% in four years, according to her. “Still, more needs to be done to support vulnerable emerging and developing countries. This is why we urgently need to strengthen the global financial safety net,” she emphasized.
Finally, Georgieva urged member countries to reinforce resources with the IMF. The organization has received criticism about the need to undergo reform, coming from Brazil itself and also from Argentina, which has billions in debt to the Fund. “A strong and adequately resourced IMF also means an IMF that is more responsive to the needs of emerging and developing economies,” she countered.
Global challenges
The IMF managing director also highlighted global challenges such as low growth, the risk of a resurgence of inflation and the fiscal crisis as a backdrop to the annual meetings of the organization and the World Bank taking place next week in Marrakesh, Morocco. Furthermore, meetings that bring together the international community to discuss global perspectives take place following the earthquake that devastated the region.
“Just weeks after a terrible earthquake, Morocco will bring together the international community in a spirit of solidarity and commitment to overcome the challenges we face,” said Georgieva, in Ivory Coast.
She also recalled that the annual meetings are taking place for the first time in Africa in 50 years, a continent in which global challenges can be seen “under a magnifying glass”. The last edition took place in Nairobi, in 1973. Since then, the world has transformed in many ways, according to Georgieva. “Inequalities within and between countries have increased and we face an existential climate crisis”, emphasized the IMF managing director. “And growth has been on a downward trajectory over the last decade,” she added.
According to Georgieva, countries need to build bridges so that the world can embark on a path of strong, sustainable and inclusive growth. A key point, in her view, is to use the “abundant resources” in advanced economies to boost the anemic global growth prospects ahead.
IMF and World Bank even considered changing the location of the annual meetings after the earthquake that devastated the region, as revealed by the BroadcastGrupo Estado’s real-time news system.
However, after discussing the topic, the two institutions confirmed that the meetings would be held on the African continent.
The annual meetings of the IMF and the World Bank take place next week, between the 9th and 15th of October, in Marrakesh.
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