Higher interest rates imposed by the world’s top central banks are increasing borrowing costs for consumers and businesses, causing the global economy to enter its lowest phase of growth since 1990, the head of the International Monetary Fund has warned.
Kristalina Georgieva, the head of the International Monetary Fund (IMF), has warned that the global economy will experience its slowest growth rate in three decades over the next five years. The IMF anticipates that global economic growth will fall below 3% in 2023 and remain around 3% for the next five years, signaling heightened downside risks.
Future economy to be “rough and foggy”
Ms Georgieva characterized the path ahead as “rough and foggy” and cautioned that cooperation to resolve the problems was becoming more challenging. She predicted that the severe slowdown in the global economy that occurred in 2022 as a result of the aftermath of the Covid pandemic and the Russian invasion of Ukraine would continue in 2023 and could persist for the next five years.
“This makes it even harder to reduce poverty, heal the economic scars of the Covid crisis and provide new and better opportunities for all,” Ms Georgieva said.
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As the Covid-19 crisis, the ongoing war in Ukraine, and the escalating cost of living continue to reverberate, the organization is preparing for a surge of requests for assistance or debt restructuring.
The lowest forecast since 1990
Since the initial rebound from the Covid pandemic in 2021, global growth in 2022 had decreased by nearly half, falling from 6.1% to 3.4%. Due to high inflation, rising financing costs, and escalating geopolitical tensions, she predicted that global growth would fall and remain sluggish for years.
The IMF predicted that growth would fall below 3% (roughly 2.8%) in 2023, with India and China accounting for more than half of the growth. The growth rate is below the average growth rate of 3.8% over the previous two decades. Despite robust employment markets in countries such as the U.S., the slowdown has persisted this year.
As global growth is expected to remain around 3% over the next five years, this is the lowest forecast for medium-term growth since 1990. Approximately ninety percent of advanced economies are anticipated to experience a decline in growth, reflecting the weight of higher borrowing costs after central banks significantly increased interest rates to curb soaring prices.
Low-income countries at serious crunch
For low-income countries, rising borrowing costs coincide with a decline in export demand. Ms Georgieva stated, “This is a severe blow, making it even harder for low-income nations to catch up.”
In her remarks, she advocated for increased assistance for low-income nations. She stated that low-income countries, burdened by higher financing costs and a decline in export demand, would experience per capita income growth below that of emerging economies.
“For the weakest members of our global family, additional support from wealthier countries is essential,”Ms Georgieva said, calling for countries to boost funds for the IMF, which makes low-cost loans to countries in need. “Poverty and hunger could further increase, a dangerous trend that was started by the Covid crisis,” she added.
Ms Georgieva stated that authorities should continue to raise interest rates to combat inflation – “so long as financial pressures remain limited” – while advocating for support for vulnerable nations.
“If that were to change, policymakers would face an even more complicated task, with difficult trade-offs between their inflation and financial stability objectives, and the use of their respective tools,” the IMF head said.
Deeper financial turmoil to slam global growth
Financial instability may have moderate to severe impacts on global growth. In a “plausible” scenario, strain on weak banks leads to a situation where “funding conditions for all banks tighten, due to greater concern for bank solvency and potential exposures across the financial system,” the IMF said. Some of these weak banks, such as the failed Silicon Valley Bank and Signature Bank, are burdened with unrealized losses as a result of monetary policy tightening and are dependent on uninsured deposits.
This “moderate tightening” of financial conditions could reduce global growth for 2023 by 0.3 percentage points, to 2.5%. Ms Georgieva proposed addressing emerging threats to financial stability through the provision of adequate liquidity.
The Fund also included a severe downside scenario with much wider effects from bank balance sheet risks. This scenario would lead to sharp cuts in lending in the U.S. and other advanced economies, a big drop in household spending, and a “risk-off” flight of investment funds to safe dollar-denominated assets.
“Clearly downside risks have increased. We now see some of the risks in the financial sector more exposed,” Ms Georgieva said, adding that she had “full confidence” that central banks and other relevant institutions were very vigilant of the dangers.
IMF head’s advice
Ms Georgieva advocated for drastic changes to be made in order to increase growth and productivity. These included investing an estimated $1 trillion year on renewable energy and taking steps to prevent the fragmentation of the global economy, which may reduce global GDP by as much as 7 percent. She stated that technological decoupling could result in losses of up to 12% of GDP for some nations.