Fortunately, the global economy did not crash. But she does walk with a ‘limp’, says the IMF

Will the global economy end up on a soft cushion after the inflation shock? It could just be possible, judging by what the International Monetary Fund announced this Tuesday in its semi-annual economic report.

After the big wave of inflation, followed by drastic interest rate increases by central banks, the world economy has so far been spared a severe recession. The scenario of a “soft landing” comes into focus, according to the World Economic Outlook which was presented during the annual meeting of the IMF and World Bank in the Moroccan city of Marrakesh.

If this scenario comes to fruition – the IMF is still keeping its fingers crossed – it will be a minor miracle. Sudden, sharp interest rate increases often lead to an economic crash, as happened in the early 1980s. Or financial instability will arise – a risk about which the IMF warned last spring. Not this time, it seems. The “resilience” of the global economy, writes IMF chief economist Pierre-Olivier Gourinchas in the foreword to the Outlook, is “remarkable.”

Weak prospects

At the same time, the Outlook is full of problems, setbacks and risks. The growth rate of the world economy is structurally declining, government debt and poverty are increasing and climate change is also increasingly making itself felt economically.

All these problems seem far away on the raked conference grounds of the IMF and World Bank, just outside the pink walls of the ancient city center of Marrakesh. Only global warming is difficult to avoid: local temperature peaks of 37 degrees can be called extreme. The air conditioners are blowing at full speed. Common temperatures here in October are around 25, at most 30 degrees.

The global economy, the Outlook states, may not have crashed, but the prospects are not very bright. Global GDP growth, which was 3.5 percent on an annual basis last year, will fall to 3 percent this year and will reach 2.9 percent next year. It is slightly lower than in the previous IMF estimate, in July.

Global economic growth is “clearly below” the average of 3.8 percent in the two decades just before the corona pandemic. The blow of corona injured the global economy and it has been “limping” since then, the IMF says. The growth forecast for the next five years is 3.1 percent per year – the worst forecast in “several decades”.

US as engine, China as problem

The Fund also notes “growing differences” between countries. The notable economic winner in recent years has been the United States. US GDP will increase by 2.1 percent this year and 1.5 percent next year – more than the IMF expected in July. The US is the only major economy to have continued its pre-pandemic growth path and even slightly surpassed it.

The eurozone is performing much less well, where GDP growth will be a paltry 0.7 percent this year and 1.2 percent next year. That is a few tenths of a percentage lower than in the July estimate. The IMF explains the difference between the US and Europe partly by the high American government expenditure, which significantly boosts the economy. The energy crisis also hit American consumers less hard than European consumers. Within Europe, the German and Italian economies in particular are performing poorly.

The biggest damper for the global economy is undoubtedly China. In the world’s second-largest economy, after the US, the recovery has been disappointing after the lifting of the draconian corona restrictions at the end of last year. The IMF is further reducing growth expectations, which are already low by Chinese standards, from 5.2 percent to 5 percent in 2023 and from 4.5 to 4.2 percent in 2024. The 5 percent growth target pursued by Chinese leaders has become uncertain , due to the malaise that largely stems from the problems in the debt-laden Chinese real estate sector.

China has become an economic risk to the world, the IMF said. “The crisis in China’s real estate sector could worsen, with global consequences” – for example for countries that supply raw materials to the Chinese construction sector.

China as a risk, the US as a growth engine – things can change. A few years ago, many economists still thought that the Chinese economy would overtake the American one by the end of this decade. For the time being this does not seem to be happening.

Poor countries are falling behind

The IMF’s GDP forecasts may not feel tangible – a few tenths off or on – but especially for emerging and poor countries they address an essential question: will they reach a sufficiently high level of prosperity to at least avoid the worst poverty? to catch? India is moving along, with growth rates of above 6 percent. But for other emerging countries, especially the poorest, the economic prospects are “weak,” the Outlook says. That means they will reach the living standards of the richer part of the world “much slower” than expected. And that their governments will be less able to bear their debts.

The pandemic and subsequent rise in food prices have driven up the debts of many countries – something the IMF will report separately later this week. Now that interest rates on government debt have also risen sharply, a fifth of emerging countries and more than half of the poorest countries are at risk of defaulting on their debt.

Two trends are playing a role in the background that are causing the IMF increasing concern: the climate problem and the global restriction of free trade.

Climate worsens the problems

The climate has rapidly gained importance within the IMF, traditionally a club mainly concerned with monetary and budgetary issues. This is because global warming complicates the economic and financial problems of many countries to which the IMF provides financial support. Host country Morocco is such a country. The Moroccan government received – perhaps diplomatically timed – a loan worth $ 1.3 billion from a relatively new IMF pot for “resilience” to climate shocks just before the annual meeting. Drought and water shortages in agriculture have become a “major source” of economic uncertainty for the country.

“Increasingly worse climate shocks,” such as floods and forest fires, are contributing to global increases in poverty, the Outlook says. Commodity prices are becoming “more volatile”.

A chapter of the Outlook highlights the proliferation of protectionist measures in recent years, a process called “fragmentation” of the global economy. It started in 2018 with the trade war between the US and China. Then came the pandemic, in which countries restricted the export of vaccines, among other things. This was followed by many export restrictions on grain and other agricultural products since the Russian invasion of Ukraine. In the meantime, the West is involved in a geopolitical battle with China to secure (chip) technology.

IMF wants more capital

If fragmentation continues to take hold in global commodity markets, this will be an “additional blow” for poor and emerging countries. The climate also suffers. The demand for critical raw materials for the energy transition – such as lithium, nickel and cobalt – will “multiply” in the coming years, the IMF says. The risk: a “slower approach to climate change”.

With this range of problems, the IMF itself must have sufficient strength to assist debtor countries that are unable to survive, said IMF Chairman Kristalina Georgieva prior to the annual meeting. The IMF has outstanding credit in 94 countries, amounting to approximately $287 billion; $23.5 billion will be loaned interest-free to the poorest countries. Georgieva called on rich countries to provide the IMF with more capital – a request about which finance ministers of the IMF countries will have difficult discussions in Marrakesh this week.