States and institutions must act against the risk of recession in the world and “stay the course” in their fight against inflation, to prevent “a dangerous new normality” of fragile economies, the managing director of the International Monetary Fund (IMF) warned on Thursday. IMF), Kristalina Georgieva.
It is critical to “stabilize the global economy by addressing the most immediate challenges,” including fighting inflation, protecting the most vulnerable populations and debt distress, he said in a speech in Washington.
But the process could be painful, and if central banks act too aggressively on interest rates, they could “plunge many economies into prolonged recession,” he warned.
The banks will have to do a tightrope walker exercise.
Also, speaking to AFP, Georgieva said that central banks must “stay the course” in the fight against inflation, which remains “still stubborn, still persistent” because “the risk of not doing enough is greater than the risk of do too much.”
“Everything will depend on the decisions we make now,” Georgieva said in her speech. These measures will determine whether “this period of fragility turns into a dangerous new normal.”
Georgieva made the remarks at the launch of the IMF’s annual meetings, which will take place next week in Washington.
Finance ministers and central bank governors from more than 180 countries will meet next week in the US capital for the first fully face-to-face meeting of the IMF and World Bank since 2019, before the covid-19 pandemic.
It will be the consequence of multiple factors: several crises exacerbated by the impact of the war in Ukraine after it was invaded by Russia and the ecological disasters that further destabilized a world economy eroded by the pandemic.
Inflation, main target
The covid-19 epidemic has caused a “fundamental change in the global economy”, moving from “a world of relative predictability” to one subject to greater uncertainty, Georgieva said.
As a result, the IMF predicts that a significant number of countries will experience at least two consecutive quarters of falling GDP, a sign of recession, between the end of this year and 2023.
It is a risk that it will overwhelm “around a third of the world economy”. And “many households around the world, even if the growth is positive, will have the feeling of being in a recession, due to the increase in the cost of living,” Georgieva stressed.
It could be even worse: “The uncertainty is very high, in a context of war and pandemic. There may be other economic shocks.”
The main objective, he insisted, must be to reduce inflation, to prevent it from taking hold and avoid “even higher and persistent (interest) rates, which would further damage growth and employment.”
Georgieva acknowledged that reducing inflation “will not be easy.”
“2022 is difficult, 2023 will be even more difficult, but the main thing is to avoid causing even more damage and in a longer period,” he added.
However, the head of the IMF warns that a rate adjustment “too strong and too fast”, and especially without coordination, could “plunge many economies into a prolonged recession.”
At higher rates, there is the fact that the strengthening of the dollar precisely because of the interest rate hikes resolved by the Fed, complicates access to credit for many countries.
The pandemic forced many countries to take on more debt, and they now face the risk of becoming over-indebted amid rising benchmark interest rates around the world.
“More than a quarter of emerging countries have defaulted (with their debt) or are in difficult levels, as well as more than 60% of low-income states,” says Georgieva. That “increases the risk of a deepening debt crisis” that could hurt global growth, he warned.
“Big creditors like China and private sector creditors have a responsibility to act,” Georgieva urged, calling for “faster and more predictable” action to restructure debt.
He also called for “transformative reforms” that the credit institution would support, in particular “in health, education, stronger security networks,” as well as digitization and development of digital infrastructure.