Global economic growth will remain below 3 percent in 2023, with the next five years of growth remaining around the same level, according to International Monetary Fund (IMF) Managing Director Kristalina Georgieva.
Georgieva stated that central banks would need to keep raising interest rates and leaving them higher for longer, to achieve the goal of restoring price stability as elevated price inflation persists throughout the world economy, which will weigh on growth prospects.
“This does not give us high hope for meeting the aspiration of people, especially poor people around the world and poor people in poor countries.”
As the world wrestles with one crisis after another, Georgieva believes that growth prospects and productivity levels will remain low without “the longer-term agenda structural reforms that are paramount.”
Malpass touched on monetary policy affecting advanced economies and emerging markets.
Global investors anticipated that central banks’ monetary policies worldwide would be “low for long,” resulting in the misallocation of capital, he explained.
Productive Uses of Capital
Malpass noted that this expectation caused inefficient uses of capital in the global economy, which has weighed on economic growth.He says the challenge will be trying to resuscitate productive uses of capital as central banks raise interest rates as part of their inflation-fighting tightening campaigns.
At the same time, these efforts have led to losses for financial institutions that “had a duration mismatch,” alluding to the failure of Silicon Valley Bank.
“So, there’s losses being allocated by the world system,” he said.
“If you just lower the interest rates back down, it won’t solve the problem,” Malpass added. “What that means is that people will suffer from inflation. The dollar weakens, yet the inflation rate goes back up, and that hurts the poor the most.”
Dollar-Swap Arrangements
Central banks slashed interest rates to zero percent in response to the coronavirus pandemic.The Federal Reserve led the charge, announcing a March 2020 emergency move that would reduce the benchmark fed funds rate (FFR) to zero, and initiated an unlimited quantitative easing (QE) program.
This raised its balance sheet to nearly $9 trillion and consisted of buying Treasury securities, corporate bonds, and mortgage-backed securities. These efforts aimed to cushion the economic blows of the COVID-19 public health crisis.
The Fed and many of its counterparts, including the Bank of Canada and the Bank of England, also coordinated a mechanism to bolster greenback liquidity worldwide through dollar-swap arrangements.
Crime, Inflation, and Fragility
Malpass thinks it’s “gravely concerning” that there is a divergence between low- and high-income populations and nations as people with lower incomes are growing at a faster pace than individuals with higher incomes.In addition to widening inequality, the World Bank head, who says he will leave the post before the end of June, believes this will lead to more countries slipping into a state of “fragility,” meaning more crime and higher prices.
“One of the concerns with crime and high prices now is that high prices are being applied to food and fertilizer,” he said.
Food Inflation Persists
The United Nations Food and Agriculture Organization (FAO) reported on April 7 that its Food Price Index has declined for 12 consecutive months.In March, the FAO’s food-price index tumbled 2.1 percent, the lowest level since July 2021, and is 20 percent lower than its peak in March 2022.
Despite the long-running slide, global food inflation pressures persist, says Maximo Torero, chief economist at the FAO.
“While prices dropped at the global level, they are still very high and continue to increase in domestic markets, posing additional challenges to food security. This is particularly so in net food-importing developing countries,” Torero said.
The IMF and World Bank will host the 2023 Spring Meetings in Washington from April 10 through April 16.