Talks around how to navigate a looming global recession next year is already highlighting conversations at the 2022 annual meetings of the International Monetary Fund (IMF) and World Bank which began on Monday in Washington DC.
The meeting which is expected to host hundreds of delegates is the first in-person gathering since COVID-19 pandemic erupted in 2020, bringing with it, unprecedented global disruptions, which is now exacerbated by the ongoing Russia -Ukraine war.
Already the IMF predicted that about one third equivalent of the world economy would have at least two consecutive quarters of negative growth between this year and next year.
The Fund further predicted that the total amount that could be wiped out by the slowdown of the world economy between now and 2026 would reach as much as $4 trillion- the size of Germany’s GDP.
The World Bank on its part is concerned that up to 70m million more people have fallen into poverty in the last two years, with also a 4 percent reduction in median income on record.
Kristalina Georgieva, IMF managing director and David Malpass, World Bank Group President raised recession concerns during a conversation they called a “curtain raiser” , going into the meetings and titled : “The Way Forward: Addressing multiple challenges in and era of volatility.”
“…The risk of global recession has gone up,” Georgieva warned, identifying the drivers to include the impact of COVID pandemic on supply chains, and when she called the senseless Russia-Ukraine war that is pushing up prices, especially in energy and food, as global inflation surges stubbornly high more than originally anticipated and necessitates tightening of financial conditions.
“For these last two years, we lived through unthinkable events that are having significant consequences- covid is still with us, Russia’s evasion of Ukraine with dramatic consequences everywhere, climate disaster on all continents and all of these have driven people into a very difficult place. People are exhausted and will have to cope with cost of living crisis,” said.
“What we see perhaps is a fundamental shift from the world of the last decades that was relatively predictable with strong rules-based international order, low inflation , low interest rates to a world that is more volatile, and with consequences that we have to grapple with here in DC during the Annual meetings this week.
“We are seeing a slow down in all three key economies of the world Eurozone because primarily of gas prices shooting up; in China, because of COVID disruptions. Due to the volatility of the housing sector we see a very significant problem in China, dragging down growth. In the United States, still very strong labor market, but also losing a bit of momentum because interest rates are starting to bite.”
She said the two Bretton Woods institutions would be advocating three major policy actions; first of all to to tame inflation, because the world would be taking a huge risk if strong actions are not taken to check inflation upsurge, which affect mostly the poor.
However, on flip side, tightening too much would materialise the fear of recession on a large scale.
“We have to think of the strong dollar that comes with tightening of financial conditions and how it impacts developing countries and maybe you have some thoughts around that.”
Secondly, she observed how many people are currently going through tough economic times globally, noting that some support is necessary, which must be well targeted, failure of which “we would be adding fuel to the flames of inflation.”
She said this is not the time for laxity as strong collaborations between the monetary policy fiscal policy is critical this year to avert the looming economic crisis.
She said thirdly, all concerned must join forces to help emerging markets and developing economies that are particularly hard hit by tightening of financial conditions, and also to get the big scary danger of debt crisis under control because “otherwise, not only countries affected by it would suffer, the whole world would suffer.”
“Not a rosy picture. But if we joined forces, if we act together, we can reduce the pain that is ahead of us in 2023,” Georgieva advocated.
Her World Bank counterpart, Malpass equally reiterated fears of a possible recession and how the poor and developing economies continue to suffer the most.
“There a Risk and real danger of a possible Recession in world next year. The advanced economies are slowing in Europe and so we’ll see where it goes into next year but the currency depreciation means that the debt levels for the developing countries are getting more and more burdensome. The rise in interest rate puts added weight on it, and inflation is still a major for everyone, but especially for the poor.
For him, “The advanced economies are taking a lot of the world’s capital, that comes in the form of the fiscal deficits that have heavy borrowing by big corporations and the central banks themselves, buying only the bonds of the very advanced countries. That puts a strain on development from the macro side.
“And then of course, from the individual side, we see the problems of education and energy shortages, of fertilizer, food and food crops. So it’s a vast array of problems.
He noted world bank poverty report last week, which shows that for the last two years, 70 million more people have fallen into poverty and is concerning, as well as a 4 percent reduction in median income.
“So as we think about our goal of a shared prosperity it’s not happening, those reversals going on in developing economies, I call it the crisis facing development.”
He said the solution would require a global community effort, including how to intensify production, get more growth, beginning with advanced economies, which have more capital and that the ability to really apply it to various sectors would help with inflation.
According to him, markets look ahead, so if there if there can be a concerted effort to describe growth policies going forward once that add to supply, then that immediately begins to address some of the concerns about inflation expectations, which are so important to get down.
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“We have to face the starting point that interest rates were probably too low at the beginning of the cycle, substantially too low. So some parts of the world are still getting back to what might be a neutral spot. So getting there quickly is important,” Malpass observed.
“And then as we think about then the capital flows, I do think there needs to be a rethinking by the advanced economies of some of the basics. One would be to have debt limits.
“It’s very hard to think about a world growth environment where a certain small group of countries have unlimited amounts of debt that they can issue even during a crisis or apart from a crisis, because as the government do that it takes up the available capital.
“And then we also have this issue of central banks buying the bonds of the advanced economies which had never been done prior to 2009 and creates both regulatory and capital bias within the world that works against the developing countries.”
He said it would be good to have subsidies but must be targeted since there’s only so much fiscal space available both in advanced economies and developing countries.
“There can’t be a subsidy for everybody because then you quickly run out of money.”
Malpass noted that the World Bank has worked hard on individual developing countries, and is primarily supporting the emergency situation, especially with with big food programs.
The bank is also trying to help the countries have better policies that had fewer subsidies for the upper ends, and more availability of inclusive financing for women, for new and small businesses within their economies.
He further observed the need to even accelerate work to create space for the climate problems that are facing many of the developing countries most.
