It is to the credit of the International Monitory Fund (IMF) and World Bank that, at the recent meeting in Marrakesh they confronted the major economic, social, environmental and geopolitical issues that the world is facing in a way that was realistic and practical.
The global economic picture is one of comparative resilience of major economies, and many emerging economies, following the end of the era of ultra-low interest rates. There has been talk of a ‘soft landing’, rather than a recession, but a more accurate metaphor might be ‘limping along’, given that while a major recession has been averted, global economic growth is subdued, falling from 3.5% in 2022 to 3% this year. Inflation is falling, but remains above central banks’ targets.
There is considerable concern over high levels of government debt, which hamper potential for investment and growth. The US primary deficit, for example, is 3% of GDP even though the economy is at near-full employment, and the ratio of Government debt to GDP is well above 100%. Political turbulence in Congress may hamper budget-setting and fiscal control.
Addressing the global picture, the World Bank’s recent ‘evolution roadmap’ document notes that improvements in poverty-reduction have stalled, with the Covid-19 pandemic a major contributory factor. Extreme poverty, defined as an income of less than $2.15 per day, fell from 38% of the world’s population in 1990, to 8.4% in 2019, but then rose during the Covid-19 pandemic.
The second report by an independent expert group on strengthening multilateral banks, The Triple Agenda, commissioned by the G20 and launched in Marrakesh, referred to a ‘world on fire’. It noted: ‘The global economy is fracturing, growth is decelerating and trust is eroding’. The report refers to ending extreme poverty, boosting shared prosperity and contributing to global public goods. It called for a tripling of lending by multilateral institutions such as the World Bank, to $390bn, including concessional funding, while consideration should be given to awarding grants to the lowest income countries for certain needs. Mitigating climate risk is important, and cannot be seen as separate from other forms of economic assistance and development.
The ‘fracturing’ of the global economy has also been a theme at this year’s meeting. It is an exceptionally complex picture, with economic rivalry and tensions over security between China and many Western nations, but also the maintenance of dialogue between Beijing and the Biden administration. There has been some in-shoring of supply chains, but global trade remains significant. The Brics (Brazil, Russia, India, China and South Africa) grouping of economies is expanding to include six new members. There has not been a debt crisis within emerging economies – at least, not so far.
The financial system globally appears to be more resilient, certainly more so than during the banking collapses of 2008. The Basel reforms and the Dodd-Frank Act in the US have led to larger capital reserves. The system is not without stresses as interest rates rise, as the collapse of Silicon Valley Bank earlier this year demonstrated. Of considerably more importance than additional capital requirements is the quality of banking supervision. The largest banks are probably safe, but there could be further institutional failures among mid-sized financial institutions.
The era of ultra-low interest rates and quantitative easing resulted in a large amount of deposits, and the temptation of some banks to take on considerable interest rate risks. Some banks have large mark-to-market losses as a result of rising rates. Accordingly there is a need for expert supervision, including monitoring of real-time market value of interest rate risk on banking books.
There has been much discussion of the new regime of ‘high’ interest rates set by central banks to curb inflation, but by historic standards the current rates of around 5% would qualify as medium-level, not high. The US Federal rate was well above 10% for a period in the early 1980s.
So the current policy represents normalisation, which follows an extended period of near-zero rates. A policy of very low rates may not return, and probably should not. There have been many undesirable side-effects of ultra-loose monetary policies, an issue that will be addressed in the next article.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.