World Bank CEO Kristalina Georgieva
Georgieva warned that if the banking system became unstable, policymakers would face more complicated trade-offs between inflation and the safeguarding the financial system. Image Credit: AP

The International Monetary Fund warned that its outlook for global economic growth over the next five years is the weakest in more than three decades, urging nations to avoid economic fragmentation caused by geopolitical tension and take steps to bolster productivity.

The emergency lender sees the world economy expanding about 3 per cent over the next half decade as higher interest rates bite, Managing Director Kristalina Georgieva said in a speech prepared for delivery in Washington on Thursday. That’s the lowest medium-term growth forecast since 1990 and less than the five-year average of 3.8 per cent from the past two decades.

For 2023, global gross domestic product will likely expand by less than 3 per cent, she said. That’s in line with the fund’s January forecast of 2.9 per cent.

About 90 per cent of advanced economies will see growth slow this year as tighter monetary policy weighs on demand and slows economic activity in the US and euro area, the IMF said. It plans to release a more detailed World Economic Outlook report on April 11 as part of its Spring Meetings held together with the World Bank.

Russia’s war against Ukraine has worsened already tense relations between the US and China, exacerbated a global inflation crisis and is spurring hunger around the world.

“With rising geopolitical tensions and still-high inflation, a robust recovery remains elusive,” Georgieva said in her prepared remarks. “This harms the prospects of everyone, especially for the most vulnerable people and countries.”

Some emerging markets are showing strength, particularly in Asia, with India and China expected to account for half of global expansion. But low-income nations are hamstrung by weakening demand for their exports, with their per-capita income growth remaining below that of the emerging economies. Poverty and hunger that increased during the coronavirus pandemic could climb.

Despite the bleak growth outlook, high inflation means that central banks must continue to raise interest rates, as long as financial stability pressures remain limited after recent banking industry upheaval in the US and Switzerland, Georgieva said.

If the banking system becomes unstable, policymakers will face more complicated trade-offs between inflation and the safeguarding the financial system, Georgieva added. “They need to be more vigilant and more agile than ever.”

Policymakers are set to converge on Washington for sessions focused on numerous global challenges, from unsustainable debt in developing nations to inflation to climate change.

Georgieva’s stark message comes a day after the IMF warned that geopolitical fragmentation, driven by tensions between the US and China, risks damaging the global economy, with foreign direct investment and other capital increasingly being channeled toward aligned blocs of countries.

She repeated a warning from January that longer-term trade fragmentation - including restrictions on migration, capital flows and in international cooperation - could cut global gross domestic product by as much as 7 per cent, equivalent to the combined annual output of Germany and Japan. Interruptions to technology trade could see losses as large as 12 per cent of GDP for some countries, Georgieva said.