Following the recent turmoil in the banking sector in advanced countries, International Monetary Fund (IMF) managing director Kristalina Georgieva has issued a warning about rising risks to financial stability and the need for caution.
The IMF chief stated at a conference in Beijing that global economic uncertainty stayed exceptionally high, and that this year’s global economic growth is predicted to slow below 3% due to the conflict in Ukraine, “scarring” from the COVID-19 pandemic, and monetary tightening.
At the annual China Development Forum, which brings together top executives from around the world and senior Chinese officials, Georgieva stated that risks to financial stability have increased 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 we have seen in recent developments in the banking sector.”
The failure of Silicon Valley Bank, a midsized US lender, earlier this month sent shockwaves through the international financial industry. This collapse prompted the demise of another US institution and the acquisition of Credit Suisse by UBS.
In addition, policymakers have taken decisive action in reaction to threats to financial stability, and central banks in advanced economies have increased the availability of US dollar liquidity, according to Georgieva. Although the market’s stresses have been somewhat reduced by these measures, the current level of uncertainty highlights the need for caution.
The IMF predicted in January that worldwide growth would slow from an estimated 3.4% last year to 2.9% in 2023 before increasing to 3.1% in 2024. Even with a more optimistic forecast for 2024, worldwide growth will still be less than the 3.8% average of the previous ten years, Georgieva told the forum.
Additionally, she reaffirmed the cautions made by a number of other conference speakers regarding the risks of the world breaking up into economic blocs, stating that this would be a dangerous division that will leave everyone poorer and less secure.
The expected strong economic rebound in China following the relaxation of its stringent COVID controls at the end of 2022, she claimed, was the most encouraging development in the global economy this year. China’s development is expected to reach 5.2% in 2023, up from 3% in the previous year, according to the IMF.
She predicted that this year, China’s development would make up about one-third of global growth. She claimed that a 1% rise in China’s GDP growth causes a 0.3 percentage point increase in other Asian economies.
Despite escalating geopolitical and trade tensions between the US and China, a number of top business executives from around the world also joined the conference in Beijing.
The chairman of Singapore’s de facto central bank, the Monetary Authority of Singapore, Tharman Shanmugaratnam, was one of the speakers who claimed that the recent macroeconomic difficulties were only the “early consequences” of instability brought on by a protracted period of low and negative real interest rates in advanced economies.
In addition to encouraging competition between the US and China, he called this prolonged period of easy monetary policy the “largest mistake in macroeconomic policy in 70 years.”
It will take substantial strategic ambition and strategic skill, according to Shanmugaratnam, for the US and China to be able to balance economic competition with the need for cooperation.
Without going into further detail, Liu Kun, China’s finance minister, stated that the current global situation was difficult due to “unprecedented changes unfolding,” including increased political tension. He stated that China would slightly boost fiscal spending this year to support the economy.