Shocks are becoming the new normal for an already weakened global economy, the head of the International Monetary Fund has warned, pointing to the war between Israel and Hamas as the latest cloud on a darkening horizon.
Kristalina Georgieva said the IMF had already been carrying out “thinking the unthinkable” scenario-planning even before this week’s violence in the Middle East became the latest setback to hopes of recovery.
The IMF managing director said it was too early to assess what the impact of the war would be on the global economy, but added: “Very clearly this is a new cloud on not the sunniest of horizons. A new cloud darkening the horizon is not good.”
The Washington-based body’s latest growth forecasts released on Tuesday had already predicted a slowing of growth next year as a result of central bank action to tackle inflation. Georgieva said the “heartbreaking” loss of life in the Israel-Hamas war was another blow.
“Shocks are becoming the new normal for a world that has been weakened by weak growth and economic fragmentation,” she told the IMF’s annual meeting in Marrakech on Thursday.
Georgieva said the realisation that interest rates would need to stay higher for longer to ease cost of living pressures was “throwing more cold water on already anaemic growth”.
She added that there was no guarantee that the orderly adjustment of bond prices to a higher interest-rate environment would last: “A sharp further tightening of financial conditions could hit markets, could hit banks, and could hit non-banks.”
The global economy has been struggling to bounce back after a series of shocks in recent years – the Covid pandemic, the war in Ukraine and the highest inflation many countries have experienced in 40 years. Growth over the coming years is expected to average 3% annually, compared with almost 4% before the start of the pandemic.
Georgieva said the IMF had been stepping up its work on anticipating future shocks. “For some time we have been thinking the unthinkable and what that would mean.”
She did not elaborate at her press conference on what these scenarios involved, but said: “We need to become more agile in anticipating shocks.”
Georgieva said she was encouraged by progress made at the IMF’s body’s annual meeting towards providing more financial firepower to her organisation and on speeding up debt relief.
A deal looks possible by the end of the year for IMF member states to increase their quotas – commitments to provide money to the fund so it can lend more to countries facing economic problems.
Georgieva said cooperation was vital and urged member countries to set aside their differences. “I can’t predict what will evolve in a world where geopolitical tensions can flare up quickly but we have to concentrate on two things: what is it we must cooperate on or the world will be in trouble, such as climate change; and where we can pragmatically chart a path bridges different views.”
