IMF warns five-year global growth outlook is weakest since 1990

WASHINGTON – The International Monetary Fund (IMF) on Thursday warned that its outlook for global economic growth over the next five years is the weakest in more than three decades, urging nations to avoid economic fragmentation caused by geopolitical tension and take steps to bolster productivity.

The emergency lender sees the world economy expanding about 3 per cent over the next half decade as higher interest rates bite, IMF managing director Kristalina Georgieva said in a speech in Washington. This is the lowest medium-term growth forecast since 1990 and less than the five-year average of 3.8 per cent from the past two decades.

Starting from 2023, global gross domestic product will likely expand by less than 3 per cent, she said, in line with the fund’s January forecast of 2.9 per cent.

About 90 per cent of advanced economies will see growth slow in 2023 as tighter monetary policy weighs on demand and slows economic activity in the United States and euro area, the IMF said. It plans to release a more detailed World Economic Outlook report on April 11 as part of its spring meetings held together with the World Bank.

Russia’s invasion of Ukraine has worsened already tense relations between the US and China and exacerbated a global inflation crisis, and is spurring hunger around the world.

“With rising geopolitical tensions, with inflation still running high, a robust recovery remains elusive,” Dr Georgieva said. “That harms the prospects of everyone, especially for the most vulnerable people and most vulnerable countries.”

Geopolitical fragmentation

Some emerging markets are showing strength, particularly in Asia, with India and China expected to account for half of global expansion. But low-income nations are hamstrung by weakening demand for their exports, with their per-capita income growth remaining below that of the emerging economies.

Poverty and hunger, which increased during the coronavirus pandemic, could climb.

Despite the bleak growth outlook, high inflation means that central banks must continue to raise interest rates, as long as financial stability pressures remain limited after recent banking industry upheaval in the US and Switzerland, Dr Georgieva said.

She said that if the banking system becomes unstable, policymakers will face more complicated trade-offs between inflation and safeguarding the financial system. “Be vigilant and more agile than ever,” she added.

Policymakers are set to converge on Washington for sessions focused on numerous global challenges, from unsustainable debt in developing nations to inflation and climate change.

Dr Georgieva’s stark message comes a day after the IMF warned that geopolitical fragmentation, driven by tensions between the US and China, risks damaging the global economy, with foreign direct investment and other capital increasingly being channelled towards aligned blocs of countries.

She repeated a warning in January that longer-term trade fragmentation, including restrictions on migration and capital flows as well as in international cooperation, could cut global gross domestic product by as much as 7 per cent – equivalent to the combined annual output of Germany and Japan, or about US$7 trillion (S$9.3 trillion).

Interruptions to technology trade could see losses as large as 12 per cent of GDP for some countries, Dr Georgieva said.

US-China clash

Russia’s invasion in 2022 sent already strong inflation in many nations spiralling to its highest level in decades.

Chinese President Xi Jinping’s support for Russian leader Vladimir Putin, including a high-profile trip to Moscow in March, drew criticism from the Biden administration and worsened the relationship between the US and China.

Relations between the world’s two largest economies have worsened in recent years. They deteriorated under former president Donald Trump, who kicked off a trade war that resulted in hundreds of billions of dollars in tit-for-tat tariffs.

President Joe Biden’s administration has sustained a hard line, focused mainly on economic and national security concerns.

Washington in 2022 unleashed strict export controls on semiconductor technologies to China and has spent years targeting Huawei Technologies, a leader in telecommunications infrastructure that the US has deemed a national security threat with ties to the Chinese government.

Just last week, Beijing opened a new front in the escalating chip battle, launching a cyber-security review of imports from America’s largest memory-chip maker, Micron Technology.

On Wednesday, US House of Representatives Speaker Kevin McCarthy and a bipartisan group of lawmakers met Taiwanese President Tsai Ing-wen in California, a visit to the US that China has protested.

Amid that conflict and after the supply chain disruptions of Covid-19, the US has encouraged nearshoring and “friendshoring”, urging companies to move suppliers into aligned countries closer to home and particularly away from Asia and China.

Dr Georgieva urged countries to be pragmatic about strengthening supply chains. She also repeated a call for IMF members to provide debt relief for distressed nations, and to contribute to a trust for the poorest countries that is short of billions of dollars. BLOOMBERG