- Global resource base and tools to deal with polycrisis are being expanded.
- Climate change related support measures are still inadequate.
- Between-and-within country income gaps are widening due to the shocks and varying policy responses.
- Asia is slowing, but still making up about two-thirds of global growth.
- Parts of Asia may benefit from geoeconomic fragmentation, but it’s a net loss for the world.
Commentary: Notes from Marrakech: Polycrisis and resilience
Global central bank heads and finance ministers gathered over the past week in Marrakech, Morocco for the Annual Meetings of the International Monetary Fund and the World Bank Group. The meetings’ overarching theme was an uneven global recovery from a multitude of shocks, ranging from pandemic to wars, prices to interest rates. There was also a cautiously constructive view that both the public sector and markets have proven to be more agile than feared to deal with frequently occurring shocks.
The polycrisis dynamic is striking. Scarring from the pandemic, the war in Ukraine, and increasing geoeconomic fragmentation are affecting the global economy in a variety of ways, altering supply chains, raising the cost of doing business, constraining consumption, and increasing risks to livelihoods. Cyclical shocks like sharp interest rate increases, withdrawal of fiscal support amid high debt, and extreme weather events are also highly problematic.
These frequently occurring shocks call for, both at the public and private sectors levels, tail risk hedging or building of redundancy buffers. These efforts would however nudge nations to horde more reserves, food, and fuel, while companies will invest in de-risking strategies by shifting supply chains and dependencies.
A few key points on the outlook, as per the IMF’s World Economic Outlook publication:
- Global growth to slow from 3.5% in 2022 to 3% in 2023 and 2.9% in 2024. These are well below pre-pandemic growth rates.
- For advanced economies, the slowdown would be from 2.6% in 2022 to 1.5% in 2023 and 1.4% in 2024. This reflects a stronger-than-expected US, but weaker-than-expected Euro Area.
- Emerging market economies are projected to slow marginally, from 4.1% in 2022 to 4% percent in both 2023 and 2024. Asean’s prospects are somewhat better. The major driver of EM slowdown is China.
- Global inflation is forecast to decline steadily, from 8.7% in 2022 to 6.9% in 2023 and 5.8% in 2024.
- Inflation is not expected to return to target until 2025 in most cases.
Cost of geoeconomic fragmentation. The IMF presented work on the weaking of cross-border trade flows, reflecting a sharp rise in trade restriction policies worldwide. It was pointed out that this could fragment global payments, limit gains from digitalisation, and reduce global pooling of risk as regions and nations turn inward. Global imperatives like inequality reduction and green transition can also be impeded by geoeconomic fragmentation.
There was concern about global spillovers from US monetary policy tightening. 500bps+ rise in short-term USD interest rates has fundamentally changed the cost of capital. If the “high for long” narrative does take hold around higher than trend inflation in the coming years, concerns would extend far beyond financial asset prices. This would make development and green transition more costly, impeding an already tall order. If financial stability is undermined due to the sharp rise in interest rates, that would also have adverse implications for the global economy.
Scarring from the pandemic is considerable, although the recovery in 2022 and so far in 2023 has been a testament to some technological and policy achievements (from vaccine development/distribution to larger allocation of resources to multilateral organisations which have supported struggling economies). Economic activity still falls short of its pre-pandemic path, especially in emerging market and developing economies.
An additional consequence of the pandemic has been to accentuate inequality trends. Volatility around economic lockdowns affecting production, jobs, tourism, the accompanying inflation and interest rate shock, and divergence in policy support across economies and sectors have left widening gaps in income and opportunities both between and within countries. Rising trade/tech restrictions don’t help, nor do commodity shocks and wars. Governments and businesses have made efforts, but the magnitude and frequency of shocks over the last three years have overwhelmed many developing economies.
Unlike the previous IMF/World Bank meetings, there appeared to be greater comfort with China’s role in various initiatives. Not much progress has been made to give China greater power and voice in multilateral forums, but China has nonetheless begun playing consequential roles in debt restructuring for some developing countries. Previous gaps in approach to debt restructuring between China and other creditors appear to have been closed substantially. China’s role in global trade and green transition is central, independent of great power rivalry.
The IMF estimates Asia to contribute two-thirds of global growth this year. But forecasts have been revised down somewhat given China’s underwhelming recovery and weak external demand in the electronics sector. There was a great deal of concern about China’s economic trajectory, as that has an outsized role in regional and global growth.
On green transition, developing countries repeated their call for a just transition, financed by grant (not debt) financing from western nations and multilateral organisations, and appreciative of income and jobs security. The ongoing work on expanding multilateral trust funds and financial facilities is welcome, but much more needs to be done.
The meetings ended with a mid-December 2023 target to complete the review of the resource quotas of IMF members. The goal is to increase the capital base so that more can be done to achieve debt sustainability, reduce inequality, and make progress toward green transition.
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Nathan Chow 周洪禮
Senior Economist and Strategist - China & Hong Kong 高級經濟學家及策略師 - 中國及香港
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