The head of the IMF called the three main problems of the world economy

The most serious problems for the world economy remain fragmented economic growth forecasts for developing countries, the need to postpone major structural changes due to persistent crises, and the fragmentation of global trade. This was announced at the opening of the Spring session of the governing bodies of the International Monetary Fund (IMF) and the World Bank (WB) on Monday by IMF Managing Director Kristalina Georgieva (Vedomosti followed the broadcast).

“The overall picture of global growth is mixed. There are emerging economies that are showing very good results, but for frontier markets, for poor countries, the future looks depressing,” said Georgieva. Per capita income in these countries will remain lower than in middle-income countries, a “dangerous discrepancy,” she said.

Constant clashes with global crises since the start of the COVID-19 pandemic in 2020 have led to the postponement of numerous long-term changes affecting the economic infrastructure of many countries, the head of the IMF said. This, in turn, led to a decrease in their economic efficiency. “As long as efficiency remains low, growth prospects will also remain weak,” Georgieva said.

“Fragmentation is deepening, which means that the integrated economy, which has created enormous potential for growth and prosperity over the past three decades, is now experiencing serious negative consequences from what is happening in the world,” she assesses. Referring to the January report of the IMF, Georgieva recalled that the fragmentation of world trade could reduce global growth by about 7% of GDP over the next few years.

Costs are inevitably rising amid deepening fragmentation, and if more restrictions are imposed on trade in technology industries, this could lead to a decline of 8-12% of GDP in some countries, Vedomosti wrote earlier, citing the IMF report. Fragmentation can also take the form of restrictions on migration, which can deprive host countries of significant labor force and aggravate the situation in their labor markets. It will also lead to a reduction in capital flows and a decline in international cooperation.

However, the destruction of existing ties will have the greatest impact on low-income countries and the poorest consumers in advanced economies, the authors of the report point out.

“The long-term cost of trade fragmentation alone could range from 0.2% of global output in a limited fragmentation scenario to nearly 7% in a hard scenario, roughly equivalent to the combined annual output of Germany and Japan,” Georgieva commented in January.

At the opening of the Spring session of the IMF and the WB, the head of the IMF also noted that reducing inflation continues to be a top priority for central banks in developed countries. “They can fight inflation by keeping interest rates high for a long time. They can also provide targeted liquidity if needed to mitigate financial stability risks,” she said. Georgieva praised the actions of the Fed and the Bank of Switzerland in resolving the situation with SVB and Credit Suisse: “We have seen outstanding, fast and effective intervention – mainly by central banks, but also by financial authorities, regulators. As soon as there was a problem in the financial sector, they responded to it very quickly. This is a strong contrast to the 2008 financial crisis.”