May 30, 2024

IMF Predicts Global Economy’s Recovery from Pandemic and Russia’s Invasion of Ukraine on Track, But Downside Risks Remain

OCTOBER 11, 2022 - WASHINGTON DC. 2022 IMF/WORLD BANK ANNUAL MEETINGS: A shortage of Life’s Essentials: The Human Cost of the Food and Fuel Crises Looking at specific actions that the international community needs to focus on to address both energy and food shocks, using concrete examples of how countries are working on tackling the immediate crises without compromising long-term goals of efficiency, sustainability, and resilience. It will examine a number of tangible solutions that are shaping a sustainable recovery from the point of view of countries and communities, offering a snapshot of immediate action from across WBG regions in our client countries. David R. Malpass, President, World Bank Group; Axel van Trotsenburg, Managing Director of Operations, World Bank; Johan Swinnen, Director General, International Food Policy Research Institute (IFPRI); Anne Beathe Tvinnereim, Minister of International Development of Norway; Seedy K. M. Keita, Minister of Finance and Economic Affairs, Gambia; Rania Al-Mashat, Minister of International Cooperation, Arab Republic of Egypt; Mostafa Terrab, Chairman and CEO, OCP GrouP. Host, Meriem Gray, Communications Lead, Sustainable Development, World Bank. Photo: World Bank / Franz Mahr

The global economy’s recovery from the pandemic and Russia’s invasion of Ukraine is on track, according to the latest World Economic Outlook by the International Monetary Fund (IMF). China’s economy is rebounding strongly, and supply chain disruptions and energy and food market dislocations are receding.

The IMF predicts that growth will bottom out at 2.8 percent this year, rising to 3 percent next year. However, downside risks remain, and the situation is fragile. Inflation is much stickier than anticipated, and the financial sector is starting to feel the effects of the sharp monetary policy tightening of the last year.

The slowdown in economic growth is concentrated in advanced economies, especially the euro area and the United Kingdom. By contrast, many emerging market and developing economies are picking up, with year-end to year-end growth accelerating to 4.5 percent in 2023 from 2.8 percent in 2022.

The IMF warns that the financial system may be tested even more as nervous investors look for the next weakest link. Financial institutions with excess leverage, credit risk or interest rate exposure, too much dependence on short-term funding, or located in jurisdictions with limited fiscal space could become the next target. So could countries with weaker perceived fundamentals.

In such a severe downside scenario, global growth could slow to 1 percent this year, implying near stagnant income per capita. The probability of such an outcome is estimated to be about 15 percent.

The IMF suggests that policymakers need a steady hand and clear communication more than ever. With financial instability contained, monetary policy should remain focused on bringing inflation down but stand ready to quickly adjust to financial developments. Fiscal policy can also play an active role in supporting monetary policy by cooling off economic activity. Regulators and supervisors should act now to ensure remaining financial fragilities don’t turn into a full-blown crisis by strengthening oversight and actively managing market strains.

The IMF also warns of the scarring impact of the pandemic, a slower pace of structural reforms, and the rising and increasingly real threat of geoeconomic fragmentation leading to more trade tensions, less direct investment, and a slower pace of innovation and technology adoption across fragmented ‘blocks.’ A fragmented world is unlikely to achieve progress for all or to successfully tackle global challenges such as climate change or pandemic preparedness. The IMF calls on all stakeholders to avoid that path at all costs.

Meanwhile, the International Monetary Fund’s latest Global Financial Stability Report has shown that the global financial system is under strain from rising interest rates, and that the failures of some institutions have led to a shakeup in market confidence.

The report has warned that risks to bank and nonbank financial intermediaries have increased as interest rates are raised to contain inflation. Historically, such forceful rate increases by central banks are often followed by stresses that expose fault lines in the financial system. Despite this, the report states that the current turmoil is fundamentally different from that of the 2008 global financial crisis as the banking system now holds much more capital and funding to weather adverse shocks, off balance sheet entities have been unwound, and credit risks have been curbed by post-crisis regulations.

However, recent banking instability has led to calls for policymakers to address gaps in surveillance, supervision, and regulation, and to strengthen resolution regimes and deposit insurance programs in many countries.

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