The risks of the global economy derailing again are increasing. After the crisis caused by the pandemic and the impact of the war in Ukraine, especially on inflation, the Managing Director of the International Monetary Fund (IMF), Kristalina Georgieva, warned of the heightened risks to financial stability at a conference in Beijing this Sunday and derivatives of geopolitical fragmentation.
His statements come two weeks after Silicon Valley Bank’s bankruptcy raised the specter of a financial crisis by spreading to other US and European companies. “It is clear that risks to financial stability have increased,” Georgieva said at the China Development Forum in Beijing, according to the speech distributed by the IMF’s services in Washington.
“During periods of higher debt, the rapid transition from a prolonged period of low interest rates to the much higher rates needed to fight inflation inevitably creates tensions and vulnerabilities, as illustrated by recent developments in the banking sector in some advanced economies,” he added added.
Federal Reserve Chairman Jerome Powell; those of the European Central Bank, Christine Lagarde and other central bankers have made the most aggressive rate hikes in decades to combat rising prices. In the United States, the rise in interest rates has caused latent losses of hundreds of billions of dollars in financial institutions’ Treasury portfolios. Those losses were one of the triggers for the deposit run that sent Silicon Valley Bank into the abyss.
Georgieva added that “policymakers have reacted decisively to risks to financial stability and central banks in advanced economies have increased the provision of US dollar liquidity.” According to the IMF’s Managing Director, “These measures have eased market tensions somewhat, but uncertainty is high, underscoring the need to remain vigilant.”
The IMF, he said, is closely following the evolution of the situation and its potential impact on the world’s economic outlook and financial stability. The fund pays special attention to the most vulnerable countries, particularly low-income and high-debt countries. The panel will provide a detailed assessment in its next report on the World Economic Outlook, to be released in the coming weeks during the fund’s spring meeting in Washington.
Last January, for the first time in more than a year, the fund dared to raise its 2023 growth forecast for the global economy, albeit just two-tenths, to 2.9%. Speaking this Sunday, Georgieva predicted that “2023 will be another difficult year with global growth slowing below 3% as the fallout from the pandemic, the war in Ukraine and currency restrictions weigh on economic activity.” Even with better prospects for 2024, global growth will remain well below its historical average of 3.8%. The forecast the fund released in January was 3.1% for the next year.
division into blocks
Georgieva is not only worried about financial stability: “Uncertainties are exceptionally high, partly due to the risks of geoeconomic fragmentation that the division of the world into rival economic blocs could entail,” he said.
The Managing Director of the IMF, who intervened in Beijing, did not further deepen this division, mainly a geopolitical rivalry between the United States and China as superpowers that reinforces protectionism and economic nationalism. Georgieva has pointed out that this geoeconomic fragmentation is “a dangerous divide that would make everyone poorer and less secure.”
Not everything was pessimism. “Fortunately, the news about the global economy is not all bad. We can see some “green shoots,” including in China,” he said, using a phrase that made fortunes in the United States in the wake of the financial crisis but was aimed at those who spoke it in some European countries that were suffered a second round with the euro crisis.
In China, Georgieva said the economy is enjoying a strong recovery and the IMF’s January forecast projects GDP growth of 5.2% this year, a sizeable increase of more than two percentage points from 2022. Driving this growth is the expected recovery in private consumption as the economy has restarted and activity has returned to normal.
“This is important for China and for the world. The strong recovery means China will account for around a third of global growth in 2023, giving the global economy a welcome boost. And beyond the direct contribution to global growth, our analysis shows that a 1pp increase in China’s GDP growth translates, on average, into a 0.3pp increase in growth in other Asian economies, a welcome boost,” he added added.
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