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The global economy faces a decade of “tepid growth” and “popular discontent” despite avoiding a much-feared recession, the IMF’s managing director Kristalina Georgieva has warned.
“The sobering reality is global activity is weak by historical standards and prospects for growth have been slowing since the global financial crisis,” Georgieva said, explaining that “inflation is not fully defeated, fiscal buffers have been depleted and debt is up, posing a major challenge to public finances in many countries”.
Combating high debt levels would be hard in a year when there is a record number of elections and at a time of heightened anxiety “due to exceptional uncertainty and years of shocks”, she said, adding that geopolitical tensions “increase the risks of fragmentation of the world economy”.
In an address to the Atlantic Council on Thursday, she added that, without measures to boost productivity and lower debt burdens, the world faced “a sluggish and disappointing” decade, which she labelled the “tepid twenties”.
Georgieva’s comments come as she prepares to welcome central bank governors and finance ministers to Washington next week for the IMF and World Bank’s spring meetings. With her five-year term due to expire in the autumn, she is widely expected to secure the nomination for a second term at the meetings.
The fund will publish an updated set of projections for the global economy next week, which Georgieva said would show more growth than anticipated in its previous World Economic Outlook in January. The IMF said then that growth in global gross domestic product would stay at 3.1 per cent in 2024 and rise to 3.2 per cent in 2025.
Strong growth in the US and large developing economies such as Indonesia and India, plus a sharper than expected fall in inflation at the back end of 2023, helped boost the global economy — as did strong jobs markets and workforces boosted by a rise in immigration.
“We have avoided a global recession and a period of stagflation — as some had predicted,” Georgieva said in Washington.
However, she warned against complacency, saying the coronavirus pandemic had caused an estimated $3.3tn in lost output since its emergence in 2020, with the costs disproportionately falling on the most vulnerable countries.
The primary driver of weaker growth was a significant and broad-based slowdown in productivity, she said, urging countries to enact measures to strengthen governance, cut red tape, increase female labour market participation, improve access to capital and adapt to climate change.
While higher interest rates had been effective in countering inflation, they also meant governments’ debt servicing costs were now at their highest level in decades.
“In advanced economies, excluding the US, interest payments on public debt will average about 5 per cent of government revenues this year,” she said. “But the cost of servicing debt is most painful in low-income countries. Their interest payments are set to average about 14 per cent of government revenue — roughly double the level from 15 years ago.”
Interest rates in many advanced economies are now at their highest levels since the turn of the millennium, but the US Federal Reserve, the European Central Bank and the Bank of England are all expected to lower borrowing costs later this year.
But Georgieva urged caution on rate cuts, saying there could be “new inflation surprises that may even necessitate a further bout of monetary tightening”.
In a swipe at the US, EU and China, the IMF chief called on countries to avoid industrial policies unless there was a genuine market failure.
But while free trade should be encouraged, she acknowledged there were limits to the policy, saying: “We must avoid past mistakes when the negative impact of globalisation on some communities was ignored and led to backlash against an integrated world economy.”