Dubai, UAE — International Monetary Chief Kristalina Georgieva said on Sunday that risks to financial stability have increased, reiterating that 2023 to be another “challenging year”, with global growth slowing to below 3 percent as scarring from the pandemic, the war in Ukraine, and monetary tightening weigh on economic activity.
Even with a better outlook for 2024, global growth will remain well below its historic average of 3.8 percent, she said at the China Development Forum.
At a time of higher debt levels, the rapid transition from a prolonged period of low interest rates to much higher rates—necessary to fight inflation—inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies, Georgieva added.
She added that policymakers have acted decisively in response to financial stability risks, and advanced economy central banks have enhanced the provision of U.S. dollar liquidity.
But while these actions have eased market stress to some extent, uncertainty is high which underscores the need for vigilance, she said. The IMF will publish a detailed assessment of the global economy in its World Economic Outlook and Global Financial Stability Report next month.
Uncertainties are exceptionally high, including because of risks of geo-economic fragmentation which could mean a world split into rival economic blocs—a ‘dangerous division’ that would leave everyone poorer and less secure.
“Together, these factors mean that the outlook for the global economy over the medium term is likely to remain weak,” she said.
The IMF continues to monitor developments and assess potential implications for the global economic outlook and global financial stability, she said.
“We are paying close attention to the most vulnerable countries, in particular low-income countries with high levels of debt,” Georgieva said.
But, she said that, the news on the world economy is not all bad.
“We can see some ‘green shoots’, including in China. Here the economy is seeing a strong rebound, and the IMF’s January forecast puts GDP growth at 5.2 percent this year—a sizeable increase of more than 2 percentage points from the 2022 rate. Driving this growth is the anticipated rebound of private consumption as the economy has reopened and activity has normalized,” the IMF chief said.
China’s robust rebound means the country is set to account for around one third of global growth in 2023—giving a welcome lift to the world economy. A 1 percentage point increase in GDP growth in China leads to 0.3 percentage point increase in growth in other Asian economies, on average, she said.
“With such a solid recovery, China can now build on positive momentum and—through comprehensive policies—stay on the growth path towards convergence with advanced economies. As the Chinese saying goes, ‘the whole year’s work depends on a good start in spring,’”.
She said the policymakers need to raise productivity and rebalance the economy away from investment and towards more consumption-driven growth that is more durable, less reliant on debt, and will also help address climate challenges.
At the same time, market-oriented reforms to level the playing field between the private sector and state-owned enterprises, together with investments in education, would significantly lift the economy’s productive capacity, she said.
IMF research shows that productivity-enhancing reforms in China could lift real GDP by as much as 2.5 percent by 2027, and by around 18 percent by 2037—growth that would be both higher quality and more inclusive.
The second opportunity presents itself in the form of green growth as China moves towards its goal of net-zero emissions by 2060. Moving to consumption-led growth will cool energy demand and ease energy security pressures in China, ultimately leading to emissions cut by 15 percent in the next three decades.