As a spectacle, this week’s half-yearly gathering of the world’s finance minsters and central bank governors in Washington will be hard-pressed to come up to the standards of the last occasion they met, in October 2022.
Inflation was soaring, there were fears that the squeeze on businesses and consumers would plunge the world into recession and war was raging in Ukraine. Yet it was the UK that was the talk of the annual meetings of the International Monetary Fund and the World Bank – and for all the wrong reasons.
Being forced to explain the thinking behind his badly received mini-budget was a chastening experience for then chancellor Kwasi Kwarteng. He received a public dressing down from his US counterpart, Janet Yellen, and then, just when it seemed things could not get any worse, they did. Kwarteng was instructed by Liz Truss to fly home early and was sacked the following day.
Many of the global problems identified by the IMF and the World Bank six months ago will feature again this week. Inflation has come down a little, but is still too high for comfort as far as central banks in the US, the eurozone and the UK are concerned. Growth is a little stronger than had been expected last October, but not significantly so. And with interest rates still rising, the risk of a hard landing in the west has by no means gone away. The IMF’s managing director, Kristalina Georgieva, was certainly not getting carried away when she delivered her curtain-raising speech in Washington last Thursday.
Nor will Kwarteng’s successor, Jeremy Hunt, be taking anything for granted. Last October, the IMF’s flagship publication, its World Economic Outlook (WEO), predicted that the UK would grow by 0.3% this year. By late January, when the IMF updated its forecasts, it was pencilling in a contraction of 0.6%. The UK’s was the only G7 country whose economy it expected to see shrink.
The resilience of the UK economy in the last three months of 2022 and in early 2023 means new WEO forecasts – due on Tuesday – are likely to make happier reading for the chancellor. Even better for Hunt, the return to financial orthodoxy in last year’s autumn statement means Britain is no longer on the international naughty step.
Indeed, Yellen herself may have some explaining to do: to assuage concerns about the protectionist implications of the Inflation Reduction Act (the $370bn package of subsidies designed to boost green growth), and over the health of the US banking system after last month’s collapse of Silicon Valley Bank.
The IMF has already said the crisis in the UK pension industry last autumn highlighted the vulnerability of the global financial system in a period of rising interest rates, and it will reiterate those fears this week. The message will be that the days of near-zero interest rates and money creation by central banks are over.
The World Bank is preparing for a new leader after the current president, David Malpass, announced in February that he was stepping down. Although his replacement Ajay Banga won’t take up his post until early June, there is already speculation about how he will respond to challenges facing developing countries.
There are at least four of these: the legacy of the Covid-19 pandemic; the likelihood, as things stand, that key development goals set for 2030 will not be met; the need to do more to improve the resilience of poor countries to climate change; and a looming debt crisis.
None of these issues can be meaningfully addressed without extra resources. Malpass’s swansong may be a capital increase for the Bank, giving it the scope to increase its lending, albeit modestly.
