IMF sees growth edging higher but still warns of ‘Tepid Twenties’

THE International Monetary Fund hinted it would nudge its global growth forecasts slightly higher, while warning that the world economy still risks a “Tepid Twenties” this decade if inflation and debt challenges aren’t addressed.

Global growth will be “marginally stronger” in the IMF’s new predictions that are due to be published on Apr 16, said managing director Kristalina Georgieva in a speech on Thursday (Apr 11). The most recent outlook in January envisaged an expansion of 3.1 per cent this year and 3.2 per cent in 2025.

Robust consumption and investment, as well as easing supply-chain problems, are among the drivers of strong growth in the US and many emerging-market economies, she said. But Georgieva added that inflation was not yet fully defeated and debt levels in most countries are too high.

“Without a course correction, we are indeed heading for ‘the Tepid Twenties’ – a sluggish and disappointing decade,” she said, pointing out that the fund’s medium-term outlook for global growth remains “well below its historical average” at just above 3 per cent.

She also called on central banks to avoid premature or delayed monetary easing, which risks triggering new inflation surprises or pouring cold water on economic activity.

“The Fed is acting prudently,” she said in an interview with Atlantic Council president Fred Kempe following the speech, which she delivered at the think tank.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The Biden administration also will likely “look at what can be done so that the economy doesn’t overheat to a point that is not healthy”, she said, while warning that a strong US dollar for a long time risks causing financial stability worries for other nations.

“There’s policy capacity for the US to manage that famous soft landing well,” Georgieva said. “So fasten your seatbelts – at some point we will be landing.”

Countries should bring their debt to sustainable levels and pursue policies to boost productivity growth via green and digital transformation, she said.

Georgieva, who’s poised to win a second five-year term as head of the fund, spoke ahead of its spring meetings held jointly with the World Bank in Washington next week.

Fresh off a trip to China in March, Georgieva said that the nation’s leadership is aware that it must chart a new course for its economy by being more decisive with failing companies in its property sector, boosting domestic demand and following through on reforms of state-owned enterprises and resolving local government debt challenges.

All of that is important beyond China’s borders, given the impact on other countries in Asia and the rest of the world. “China making good choices would be good for everybody,” she said.

Industrial policy

She also highlighted an increase in industrial policy actions worldwide last year, citing an analysis that shows more than 2,500 interventions. China, the European Union and the US account for almost half of the total, she said.

“There is a need for caution” in such measures, Georgieva said. But she added that there’s a case for industrial policy to help address market failures, like encouraging innovations that tackle climate change.

Trade tensions have risen in recent months as the US and Europe criticise China for adopting what they call unfair policies to promote industries including electric vehicles, arguing the result is overcapacity that distorts global prices.

China has pushed back, saying the current output of green industries is far from meeting demand, and vowing to rely on markets to remove overcapacity where it exists.

She also warned that there’s a growing divergence within and across country groups, with the US economy rebounding strongly while Europe has a more gradual recovery.

Low-income countries suffered the most severe scarring effect from the pandemic, and fragile and conflict-affected economies are bearing the heaviest burden, she said. BLOOMBERG