Worst is yet to come warns IMF chief

International Monetary Fund managing director Kristalina Georgieva, has warned the world has to face the fact  that the worst is yet to come and warned fiscal policies cannot step on the accelerator in the current climate.

Speaking at the Asia-Pacific Economic Cooperation (APEC) Leaders’ Summit in Thailand she said the APEC nations has to come together as fragmentation would spell disaster.

“Regarding 2023, we have to recognise that tougher times lie ahead. The worst is yet to come,” Georgieva warned. “The IMF is projecting global growth to slip to 2.7% next year. Most APEC countries are decelerating and at least one third of the world is going to be in recession. The three major engines of global growth US, China, and Europe are slowing down simultaneously and that is hitting the exports of emerging markets.

“That said, there are a few bright spots: ASEAN is one of them. So are some of the countries benefiting from terms of trade improvements, for example, in the Gulf. But overall, we face a darker economic horizon and downside risks predominate.”

She added that the risk of inflation is a “clear and present danger” and addressing it must be a high priority. Otherwise, it will cause destabilisation and will hurt the poor most.

“All this makes 2023 a much harder year for policymakers than 2020,” said Georgieva. “Back then, policymakers had one common objective: to support the economy, meaning that monetary policy and fiscal policy were moving in the same direction. Now fiscal policy must be deployed very carefully to target the most vulnerable parts of economy but without undermining monetary policy and the fight against inflation.

“In other words, with monetary policy stepping on the brakes, fiscal policy should not step on the accelerator.”

She explained the current conjuncture is difficult for everybody. But it is even more difficult for emerging markets because, on top of everything else, they are experiencing negative spill overs from the tightening being undertaken by major central banks in the advanced economies. Why? Because of depreciation of currencies and higher borrowing costs.

“There are also financial stability risks, including volatile capital flows, higher debt service, and higher leverage especially in the private sector. Banks are sound, but non-bank financial institutions that have not been regulated are a concern–the leftover business from the Global Financial Crisis. There is also the concerning developments in the crypto market that we have seen recently,” she continued. “We should be in a mode of alert, not alarm — and develop policies to address these risks.

“Meanwhile, climate risks are also rising. For the first time this year, we have seen climate shocks across all continents, with Asia-Pacific disproportionately affected. Since 1989, 36% of climate-related disasters have occurred in this region.

“We also face the risk of fragmentation: we have to be careful that we are not sleepwalking into a poorer, less secure world, and drifting away from what has made us all better off.”

“APEC in particular has greatly benefitted from integration, that is 21 economies representing 60% of global GDP,” added Georgieva. “Asia has the strongest regional value chains; Latin America’s biggest trading partners are across the Pacific; two-thirds of U.S. imports comes from APEC.

“Over the last three decades, as a result of this integration, 1.5 billion people were lifted out of poverty and hundreds of millions entered the middle class.

“IMF analysis indicates that, if the world were to divide into two distinct blocs with little or no trade between them, output would drop by more than 1.5% of global GDP: a loss of about $1.5 trillion. In Asia, because it is so integrated, these losses would double to more than 3 percent of GDP.

“In addition, there is the potential human cost of fragmentation: poverty, hunger, and social unrest. But this need not be our future.”

She concluded: “We live in a more shock-prone world. That means more shocks will come. We need to build resilience to these shocks.”

As such there needed to be more Resilient populations, educated and healthy, with strong social safety nets.

“We require Resilient economies, with strong macroeconomic fundamentals and agile, adaptable policies; and a resilient planet, one that we can pass on to the next generation–the way we inherited it from our parents.”