The global economy is heading for the weakest period of growth since 1990 as higher interest rates set by the world’s top central banks drive up borrowing costs for households and businesses, the head of the International Monetary Fund has warned.
Kristalina Georgieva, the IMF’s managing director, said a sharp slowdown in the world economy last year after the aftershocks of the Covid pandemic and the Russian invasion of Ukraine would continue in 2023, and risked persisting for the next five years.
In a curtainraiser speech before the fund’s spring meetings in Washington DC next week, she said global growth would remain about 3% over the next five years – its lowest medium-term growth forecast since 1990.
“This makes it even harder to reduce poverty, heal the economic scars of the Covid crisis and provide new and better opportunities for all,” Georgieva said.
In a downbeat assessment as the world grapples with the worst inflation shock in decades, she said economic activity was slowing across advanced economies in particular. While there was some momentum from developing nations – including China and India – low-income countries were also suffering from higher borrowing costs and falling demand for their exports.
Ahead of the IMF publishing revised economic forecasts next week, Georgieva said global growth in 2022 had collapsed by almost half since the initial rebound from the Covid pandemic in 2021, sliding from 6.1% to 3.4%. With high inflation, rising borrowing costs and mounting geopolitical tensions, she said global growth was on track to drop below 3% in 2023 and remain weak for years to come.
As many as 90% of advanced economies would experience a decline in their growth rate this year, she warned, with activity in the US and the eurozone hit by higher interest rates.
Comparing the challenge to “climbing one ‘great hill’ after another,” Georgieva said there were still more problems to overcome: “First was Covid, then Russia’s invasion of Ukraine, inflation and a cost of living crisis that hit everyone.
“So far, we have proven to be resilient climbers. But the path ahead – and especially the path back to robust growth – is rough and foggy, and the ropes that hold us together may be weaker now than they were just a few years ago.”
Despite highlighting the impact of higher central bank interest rates on economic activity around the world, Georgieva said an approach to “stay the course in the fight against inflation” was still required.
“There cannot be robust growth without price stability – nor without financial stability. And these days, both need the attention of policymakers,” she said.
The IMF chief said turmoil in the global banking industry over the past month showed there were still dangers for central banks to overcome. However, she urged policymakers to continue using higher interest rates to tackle inflation, while providing separate support for struggling banks. “This is the right course of action so long as financial pressures remain limited.”
The IMF meetings next week will be its first gathering of world leaders and central bank leaders since Britain fell under the spotlight at its annual meeting in the autumn, when Kwasi Kwarteng was recalled to London by Liz Truss to be sacked after the disastrous mini-budget.
The IMF said on Tuesday that the crisis in the UK pension industry last autumn had highlighted the vulnerability of the global financial system in a period of rising interest rates.
Reiterating those risks, Georgieva said that while the global banking system had “come a long way” since the 2008 financial crisis, that “concerns remain about vulnerabilities that may be hidden, not just at banks but also non-banks.
“Now is not the time for complacency.”
