International Monetary Fund (IMF) Managing Director Kristalina Georgieva warned of further slowdown in global economy in 2023 before bouncing back next year as the world’s top lender has downgraded its growth forecast three times since October 2021.
“Our projection is that we will go by half a percentage point down vis-a-vis 2022. The good news though is that we expect growth to bottom out this year and 2024 to be a year in which we finally see the world economy on an upside,” Georgieva said.
She told CNBC on Tuesday that the days of her institution giving regular global growth downgrades are nearly over. “I don’t see a downgrade now, but growth in 2023 will slow down,” Georgieva said at the World Economic Forum in Davos, Switzerland.
On the issue of central banks potentially cutting interest rates, Georgieva said we are “not quite there yet,” as inflation is slowing down but remains “still quite high” and added, “Central banks have to be careful not to pull their foot from the brake too early,” she added.
Last week, the US saw its inflation rate hit its lowest level since October 2021, while euro zone inflation dropped for a second consecutive month in December.
About China, Georgieva repeated the IMF’s projections that the country will see GDP increase, but that it won’t make up as large a portion of global growth as it has in the past.
“The China growth rates are not going to return to the days when China delivered about 40 percent of global growth, this is not going to happen,” Georgieva said, with the country having experienced below-average growth for the first time in 40 years in 2022.
If China stays the course with its current Covid-19 reopening agenda, the country will reach the IMF’s growth projections of 4.4 percent by the end of the year, Georgieva said. “Not 7 percent, not 6 percent, but in a better place above average growth,” she added.
Trade fragmentation can cost global economy up to 7% of GDP
The statement comes just a day after IMF said trade fragmentation could cost the global economy up to 7 percent of GDP and warned that the developing world would fall further behind during the process.
In a new report, the IMF noted that the longer-term cost of trade fragmentation varies from 0.2 percent of global output to almost 7 percent, which is roughly the combined annual output of Germany and Japan.
However, the document, which outlines a “Gordian knot of challenges” that policymakers face, doesn’t state how long the fragmentation could take to impact growth of this magnitude.
Depending on the definition of “fragmentation,” some forecasts by the IMF are even bleaker. Estimates that include technological disconnect between regions suggest that countries could lose up to 12 percent of GDP.
The term fragmentation refers to a supply chain that is broken up into different parts. Companies spread the production process across different suppliers and manufacturers when they fragment. As such, companies use separate suppliers and component manufacturers to produce their goods and services.
In its report, the IMF has listed a number of factors contributing to increasing global fragmentation, including Russia’s invasion of Ukraine and the Covid-19 pandemic.
Both situations have caused international disruption to financial, food and energy supplies, with additional trading restrictions adding to the discord between regions.
“The risk is that policy interventions adopted in the name of economic or national security could have unintended consequences, or they could be used deliberately for economic gains at the expense of others,” the report says.
It also notes restrictions on cross-border migrations, reduced capital flows and a decline in international cooperation as different types of fragmentation.
Effects on the developing world
The IMF does not expect all countries to feel the impacts of fragmentation equally. Lower-income consumers in advanced economies would no longer have access to cheaper imported goods, leaving small open-market economies particularly vulnerable. “Most of Asia would suffer due to its heavy reliance on open trade,” the report says.
Emerging and developing economies would also cease to benefit from “technology spillovers” from more advanced economies, which in the past have helped to boost growth and living standards.
“Instead of catching up to advanced economy income levels, the developing world would fall further behind.”
The IMF recommends three approaches to tackling fragmentation: strengthening the international trade system, helping vulnerable countries to deal with debt and stepping up climate action.