After a period of rising prices and steep interest rates, Christine Lagarde allowed herself a moment of optimism this week.
“We are seeing clear signs of recovery,” the president of the European Central Bank said on Wednesday. A “phenomenal” labor market will be accompanied by a recovery that, while “tepid” at first, will gain momentum over the course of 2024, she added.
Her tone of relief, echoed elsewhere in sunny Washington during the spring meetings of the IMF and World Bank, was understandable. A buoyant U.S. economy, rising domestic demand in India and easing price pressures elsewhere have reduced the likelihood of a much-feared global recession to near zero. The IMF now forecasts the global economy will grow 3.2 percent this year, up from the 2.9 percent forecast six months ago.
“The mood was a little more positive this time,” said Masood Ahmed, president of the Center for Global Development think tank and a former IMF and World Bank official. “The short-term economic outlook is slightly better.”
But the joy at the seemingly soft landing among central bankers and ministers in Washington was greatly tempered by two factors.
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The first was the increasing possibility that ongoing pricing pressures in the US will keep Federal Reserve interest rates, and therefore global borrowing costs, higher for longer. That will burden emerging markets with high dollar debts and complicate plans by the ECB and other central banks to cut their own interest rates, even as they insist they will not be influenced by considerations in Washington.
The bigger cloud on the horizon was an increasingly bleak forecast for the outlook for global growth later this decade. The global economy is in danger of falling into “the balmy 1920s,” IMF managing director Kristalina Georgieva warned ahead of the meetings if policymaking does not change dramatically.
The medium-term forecasts in the fund's Global Financial Stability Report, which shows where officials think growth will be in five years, are the lowest in decades. By the end of the 2020s, global growth would decline by more than a percentage point compared to the pre-pandemic average, the fund said.
Christine Lagarde comes to Washington for the spring meetings of the IMF and World Bank. The President of the European Central Bank assumes that the economic recovery will gain momentum © Jose Luis Magana/`
What lies behind the gloomy mood is a mix of weak productivity, a retrenchment of globalization – and the resulting frequent bouts of geopolitical unrest.
Taken together, this toxic combination would depress growth to deplorable levels, sowing the seeds of “popular discontent” with mainstream politics, Georgieva warned. The risk is particularly pronounced in some of the world's poorest countries, which are likely to fall even further behind their emerging and developed market counterparts.
The trend — and how to address it, the IMF chief added Thursday — is “what I think.” [about] when I wake up in the middle of the night.”
The fund's pessimism has built up They suggest that years of low interest rates after the 2008 global financial crisis led to a misallocation of capital that kept inefficient zombie companies in business and prevented investments from being directed toward more promising and profitable activities.
Low investment led to sluggish productivity growth in several major economies, particularly in the EU. Officials worry that countries, particularly those with aging populations and less budget space, will struggle to reverse the trend.
2,500+ Number of political interventions worldwide last year according to IMF calculations
Donald Kohn, a former Fed vice chairman now at Brookings, says the global situation is likely to remain more difficult than the more favorable conditions of recent decades. “In the 1990s and 2000s there were a number of positive supply shocks, for example the fall of the Iron Curtain, the integration of Eastern Europe, China's entry into the WTO and so on,” he says.
Now these positive shocks no longer come. Instead, the global economy is being hit by upheavals such as the pandemic and wars. “This is clearly bad news for the global economy.”
In addition, the strong increase in global labor supply in previous decades has slowed, putting upward pressure on costs and prices. “The central banks have to counteract this,” adds Kohn.
Another major concern for participants is the fragmentation of the global trading system, with nations – including the world's two largest economies, the US and China – increasingly resorting to tariffs and subsidies to protect domestic interests.
Gita Gopinath, the IMF's first deputy managing director, has previously warned of the damaging impact that trade fragmentation could have on global GDP © Ken Cedeno/Reuters
Industrial policy, once anathema in global economic policy circles, is back on the agenda. According to IMF calculations, there were more than 2,500 political interventions worldwide last year. The world's three major economic powers – China, the EU and the USA – account for almost half of the total volume.
Gita Gopinath, the IMF's first deputy managing director, warned in December that global losses from trade fragmentation could be as much as 7 percent of gross domestic product.
Opponents of this kind of interventionism fear that in a year when more than half of the world's population goes to the polls – including in the US and Europe – politicians will be tempted to erect ever greater barriers to trade to win votes.
Presumptive Republican US presidential nominee Donald Trump plans to impose a 10 percent tariff on all imports, a proposal criticized on Tuesday by World Trade Organization Director-General Ngozi Okonjo-Iweala.
“I sincerely hope that this will not happen,” she said at a Peterson Institute event, “and that if it does happen, other members will keep their cool and not retaliate so that we can preserve the world trading system.”
US Federal Reserve Chairman Jay Powell (left) with Bank of England Governor Andrew Bailey in Washington this week. Central bankers have been wary of cutting interest rates too quickly © Jose Luis Magana/`
But the mood in Washington is hawkish on both sides of the aisle. President Joe Biden said this week he wants to triple tariffs on Chinese steel.
On the sidelines of the meeting, other organizations accused the IMF and WTO of neglecting the losers of the post-World War II effort to create a global economic order that favors the elites.
“The problem of the last 50 years has not been globalization, but globalism,” says Ian Bremmer, founder of the Eurasia Group. “They were decisions made by a small number of beneficiaries that were very influential and said, 'We're not going to pay attention to the fact that the social contract is eroding.'”
Closing the productivity gap will require new thinking, the fund warned. Steven van Weyenberg, the Dutch finance minister, reiterates his message that governments must “find new growth drivers”. This could include making it more attractive for workers to stay at work longer, he tells the Financial Times.
More immigration – a factor that, as politically contentious as it may be, is at the heart of the U.S. economy's impressive performance, according to many at the meetings – was also touted in Washington as a way to restore global growth. Others here suggested that efforts to strengthen investment in key skills and women's participation in the labor market could boost productivity, along with the time-saving potential of generative artificial intelligence.
However, there was a view at the spring meetings that there may not be much time or space left for finance ministers and central bankers to turn the tide.
People read that there is a massive deficit in the US and believe it to be true. But then they just move on with their lives
What makes the situation so difficult is the meager fiscal firepower that so many countries have. Central bankers in the U.S. and elsewhere, fearful of the worst inflation in generations, remain cautious about cutting interest rates and reducing government borrowing costs.
Combining the “incredible amounts of investment” required for future growth with “sound and sustainable public finances requires decisions,” says van Weyenberg. “There’s quite a challenge ahead of us here.”
The US has been at the center of the concerns of many senior policymakers. The fund expects it will run a budget deficit of 7.1 percent next year – more than three times the 2 percent average for other advanced economies – while the Congressional Budget Office expects its net interest payments after 2026 to reach the will exceed the $1 trillion mark.
Many economists expect fiscal conditions to continue to deteriorate as the policymaking class appears uninterested in curbing borrowing, regardless of the outcome of the presidential election.
The concerns are not limited to the United States. China, grappling with looming deflation and weak growth, is expected to post a deficit of 7.6 percent in 2025 – more than double the 3.7 percent average for other emerging markets.
Kristalina Georgieva, managing director of the IMF, at the fund's headquarters on Friday. She says she is concerned that sluggish growth could lay the foundation for “popular discontent.” © Mandel Ngan/AFP/Getty Images
Some believe the danger is that in an environment of frequent shocks – from wars to pandemics – authorities are more likely to ignore the increasing fiscal risks than address them.
“There is a tolerance and willingness to live with these risks,” says Ahmed of the Center for Global Development. “People read that there is a massive deficit in the US and believe that to be true. But then they just move on with their lives.”
With the long-feared hard landing due to staggering interest rate hikes failing to materialize, concerns about the economic outlook have continued to recede. “People are now less worried about the near future,” adds Ahmed.
But given the forces standing in the way of robust growth in the coming years, the current economic recovery could prove discouragingly fleeting. The downward trend in the IMF's longer-term growth forecasts looked like a “Swiss ski slope,” Georgieva said. “I don’t want that in the future.”
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