Finance ministers from some of the world’s largest economies refused to have their optimism dented by the gloomy message delivered by top IMF officials at the fund’s spring meetings in Washington this week.
Despite IMF forecasts highlighting the potential for a hard landing for the global economy, Bruno Le Maire, France’s finance minister, said the prospects for his country were “solid”.
Jeremy Hunt, UK chancellor, thought the IMF was over-egging the pessimism, especially about Britain. “They’re just one of a number of forecasters,” he said. “The IMF have undershot on the British economy for quite a long time — I think every year since 2016 bar one, they have undershot.”
Janet Yellen, US Treasury secretary, echoed the sentiment. “I wouldn’t overdo the negativism about the global economy,” she said. “The outlook is reasonably bright.”
Kristalina Georgieva, IMF managing director, hit back, saying that while the outlook was “not horrible” and the global economy was “not in recession”, no one was looking at growth forecasts and saying “oh, these are fabulous numbers”.
Georgieva’s deputy, Gita Gopinath, highlighted the fund’s concerns that political tensions would weigh on the economy, warning countries against “going down the slippery slope of fragmentation”.
The fund’s medium-term projections, which cover the next five years, are at their lowest level since globalisation really took off in the 1990s, with IMF officials increasingly concerned that weaker trade links will lower efficiency and raise prices.
Gopinath said that supply shocks risked becoming more frequent, which would mean that policymakers faced “much more serious trade-offs”.
Daleep Singh, who served as deputy director of US president Joe Biden’s National Economic Council and is now at PGIM Fixed Income, agreed, saying the primacy of national security over economic goals “likely means lower levels of growth and higher levels of inflation”.
The rich advanced-economy G7 bloc indicated on Wednesday that those economic trade-offs were a price worth paying for more security, saying that supply chains needed to adapt as a way of “protecting our shared values”.
Some finance ministers, such as Germany’s Christian Lindner, were also concerned about the threat posed by the demise of Silicon Valley Bank and Credit Suisse, such as the prospect of more banking failures.
The optimists drew attention to strong labour markets, China’s emergence from its zero-Covid policy and Europe’s lower wholesale energy prices, which have helped the region avoid a recession.
Jean Boivin, head of the BlackRock Investment Institute, blamed the disagreements on the fact that there was a “genuine high degree of uncertainty” about the outlook, and the global economy was yet to fully recover from the onset of the coronavirus pandemic.
This was not a “traditional business cycle”, where the data would point to resilience. Instead, blockages in supply chains and a tight labour market suggested that “more needs to be done to bring inflation down”, he said.
A rare consensus formed over the view that central banks needed to stay the course in keeping borrowing costs high after a series of aggressive rate rises throughout 2022. Raghuram Rajan, professor of economics at Chicago university, attacked governments for triggering price pressures in the first place, singling out US inflation as the result of “pretty extravagant” borrowing and spending.
But differences in what Georgieva called the “interpretation” of the outlook led to difficulties in deciding how serious banking turmoil would need to be before rates were cut.
Pierre-Olivier Gourinchas, IMF chief economist, admitted that it was a “fuzzy area” which the fund was trying to think about more carefully.
Adam Posen, head of the Peterson Institute for International Economics, a Washington-based think-tank, said tightening credit conditions was what the Fed intended to do all along in response to last year’s surge in inflation. “That’s the point in a sense,” he said. “It is a feature, not a bug.”
Some central bankers insisted that the separation of monetary and financial policy was paramount and needed to continue.
Andrew Bailey, governor of the Bank of England, said its actions last autumn in helping the UK resolve its pension funds crisis did not stand in the way of monetary policy decisions. “What we have not done — and should not do — is in any sense aim off our preferred setting of monetary policy because of financial instability,” he said.
However, others signalled that the banking stress was influencing their thinking on interest rates.
Joachim Nagel, head of Germany’s Bundesbank, said the European Central Bank would “need to assess whether the recent turmoil has led to an excessive tightening of credit conditions”. He added that, if it has, that “could have an impact on our policy stance”.
Fragmentation was also a feature of the crucial debate on debt relief for the rising number of distressed sovereigns.
China, now the world’s largest bilateral creditor, continued to block progress, although it did attend discussions on the topic, and its central bank governor Yi Gang paid lip service to the idea of co-operating with globally-agreed frameworks.
In previous years, debt distress would have been the talk of the meetings, but this year it was just one of a wide number of unresolved issues. With less of the lending coming from G7 governments and their banks than in the past, it was also an easier one to ignore.
If that is good news for advanced economies, the lack of fixes for global problems suggests that the IMF will continue to fret about the world’s economic prospects in the months ahead — even if some of the most powerful finance ministers think it is being too gloomy.
Additional reporting by Martin Arnold in Frankfurt