In the past three years, the world economy has been subjected to an unprecedented series of shocks. After the outbreak of the pandemic, Russia’s invasion of Ukraine brought additional disruption. Both contributed to a cost-of-living crisis, with central banks rushing to raise interest rates to curb runaway inflation. The international economic system has arguably proved remarkably resilient. The bleakest predictions of a widespread financial crisis and a chain of debt defaults by low-income countries have so far been avoided. But the global economy is badly hit. The IMF forecasts the weakest global medium-term growth prospects in over 30 years. Policymakers meeting this week at the World Bank-IMF Spring Meetings have their hands full trying to stabilize the global economy and put it on a higher growth path.
The IMF is forecasting global growth of 2.8 percent for this year, which is slightly below January’s expectations. It also provides a 25 percent chance that growth could fall below 2 percent. In fact, price pressures are proving to be more persistent than expected and economic conditions have become more vulnerable. A senior IMF official warned of “acute” risks to the global financial system and many advanced economies are likely to be sluggish this year as high interest rates weigh on lending. To get the global economy back on track, you must address several pressing risks.
Although the banking system has calmed down somewhat after the collapse of three US banks and the emergency takeover of Credit Suisse by UBS in March, the financial markets remain on shaky ground. Central banks are seeing the end of this cycle of rate hikes, but the rapid reversal of a decade of easy money is exposing vulnerabilities. There are concerns about the impact of high interest rates on commercial real estate and the non-bank sector. Central bankers face a balancing act: they must limit further instability and ensure high inflation does not take hold.
At the same time, higher borrowing costs are hitting developing countries, which have accumulated enormous debt to deal with the pandemic and high food and energy prices, exacerbated by a strong dollar. Around 60 percent of low-income countries are at high risk of a debt crisis or are already experiencing a debt crisis. The poorest countries are also facing the largest external debt service bills in 25 years.
Heavy debt burdens complicate the task for developing countries, which will need over $2 trillion annually through 2030 to reduce emissions and deal with damage from climate change. Stepping up efforts to combat global warming is paramount to prevent people in poor countries from sliding deeper into poverty and to spur growth and job creation. Geopolitical risks are also clouding the global outlook. The IMF notes that the long-term cost of trade fragmentation as a result of US-China tensions could be about 7 percent of global GDP. Trade barriers, investment and technology transfer would limit growth, especially in poorer countries.
Politicians must mitigate these risks. Regulators must remain vigilant about the knock-on effects of high interest rates; The recent banking crisis should also be a wake-up call to improve banking and non-banking regulation. It is hoped that the meetings will allow progress on a framework for an orderly restructuring of the debt of developing countries, including China, for all creditors. Efforts to mobilize more climate change finance from international financial institutions, both through more efficient use of their balance sheets and through partnerships with the private sector, are also crucial. The complex and interrelated challenges facing countries call for an ambitious and collaborative global response. This week’s meetings are a crucial moment to get that going.
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