The Financial Times noted that it can be said that the international economic system has displayed remarkable resilience, as the most pessimistic forecasts for a widescale financial crisis and a chain of debt defaults by low income countries has been avoided so far.
Nonetheless, it stressed in an article titled ‘The Fragile Global Economy’ that the global economy is badly scarred.
The newspaper explained that over the past three years the global economy has been subjected to an unprecedented series of shocks. After the COVID-19 pandemic, the Ukrainian war brought added disruption. Both developments contributed to a cost of living crisis, with central banks raising interest rates rapidly to contain runaway inflation.
Although some calm has returned to the banking system following the collapse of three US banks and Credit Suisses emergency takeover by UBS in March, financial markets remain on shaky ground, and there are concerns over the impact of high interest rates on commercial real estate and the non-bank sector.
The newspaper pointed out that central banks face a balancing act: they must limit further instability and ensure high inflation does not become entrenched, as higher borrowing costs are hitting developing countries that have amassed enormous debts dealing with the pandemic and high food and energy prices, exacerbated by a strong dollar.
Around 60 per cent of low-income countries are at high risk of or already in debt distress. The poorest countries also face the largest bills for servicing foreign debts in 25 years.
High debt burdens complicate the task for developing countries which need over $2 trillion a year by 2030 to cut emissions and deal with damage from climate change. Boosting efforts to tackle global warming is paramount to prevent people in poor countries falling deeper into poverty, and to drive growth and job creation. Geopolitical risks are also undermining global prospects.
The IMF believes that the long-term cost of trade fragmentation, as a result of tensions between the US and China, could be around 7 per cent of global GDP. Barriers to trade, investment and technology transfer would limit growth, particularly in poorer countries.
Policymakers will need to mitigate these risks, while regulators will have to remain vigilant to effects of high interest rates. The recent banking crisis ought to be a wake-up call to improve bank and non-bank regulation.
The article concluded by noting that the complex and connected challenges facing countries require an ambitious and co-operative global response. This week’s World Bank and IMF meetings in Washington are a crucial moment to set that in motion.
The IMF lowered its global growth forecast for 2023 with the slowdown in interest rate hikes, but warned that severe financial system disruptions would lead to production cuts.
In its latest World Economic Outlook report, the IMF said that the risks of contagion in the banking system were contained through strong policy measures after the collapse of two US banks and the forced merger of Credit Suisse. The unrest added to the uncertainty created by rising inflation and the spillover effects of Russia’s war in Ukraine.
“With the recent increase in financial market volatility, the fog around the world economic outlook has thickened,” the IMF said at the outset of the joint meetings with the World Bank in Washington.
The Fund added that “uncertainty increases and the balance of risks strongly shifts to a downward trend when the financial sector is unstable.” The IMF now expects global real GDP growth of 2.8 percent in 2023 and 3 percent in 2024, down sharply from 3.4 percent growth in 2022 as a result of monetary tightening.
Source: Qatar News Agency