The spring meetings of the World Bank (WB) and the International Monetary Fund (IMF) are taking place in Washington from 17-19 April.
Finance ministers and central bank governors from around the world are attending the spring meetings, and among the topics on the agenda are debt relief for countries in difficulty, the Ukraine issue and what to do with Russia’s confiscated assets.
Of course, the interest rate/inflation cycle and the fate of possible interest rate cuts by the US Federal Reserve are also on the agenda. Equity markets were thrown into a bit of turmoil this week when Fed Chairman Jay Powell signalled that the Fed was in no hurry to cut interest rates.
According to IMF President Kristalina Georgieva, the Fed is doing the right thing. “The Fed is not yet ready to cut, and rightly so,” Georgieva told Bloomberg on Thursday.
Noting that the key question at the Washington meetings is “how long the Fed will keep rates high”, the IMF chief said “all countries are talking about it and all eyes are on the US”.
Georgieva argued that the strengthening of the dollar was “of course worrying” and said that the economy was “somewhat overheating”, partly due to the US fiscal stance.
Georgieva added that she remains optimistic that conditions in the US will allow the Fed to start cutting interest rates later this year.
Georgieva calls for fiscal tightening
Georgieva also called on advanced economies, which have greatly increased their debt levels in recent years, to tighten their fiscal policies to deal with the pandemic crisis.
“Countries urgently need to build fiscal resilience for the next shock. It is important to rebuild fiscal buffers,” she said.
According to Georgieva, she argued that central banks struggling with inflation could also “get some help from the fiscal side”.
Georgieva’s comments before the start of the meetings were also relatively “pessimistic”. According to her, “a stagnant and disappointing decade” lies ahead. Without a course correction,” the IMF chief said, “we are heading for the tepid twenties”.
Georgieva’s comments echoed the findings of the IMF’s World Economic Outlook report. The report said: “Faced with a variety of headwinds, the outlook for future growth has also deteriorated. Looking ahead five years, global growth is projected to slow to just over 3 percent by 2029. Our analysis suggests that by the end of the decade, growth could be about one percentage point below the pre-pandemic (2000-19) average. This threatens to reverse improvements in living standards, while the imbalance of the slowdown between richer and poorer countries could limit prospects for global income convergence,” the report says.
The report stresses that a prolonged low-growth scenario, coupled with higher interest rates, could threaten debt sustainability and limit the ability of governments to tackle economic stagnation and invest in “social or environmental initiatives”.
Development of poor countries will have to wait for another spring
Half of the world’s 75 poorest countries have seen their income gap with the richest economies widen for the first time this century, marking a historic reversal in development, the World Bank said in a report published on Monday.
According to the report, the gap between per capita income growth in the poorest countries and per capita income growth in the richest countries has continued to widen over the past five years.
Ayhan Kose, deputy chief economist at the World Bank and one of the report’s authors, told Reuters: “For the first time we see that there is no convergence. They are getting poorer. We are seeing a very serious structural regression, a reversal in the world … so we are ringing alarm bells here,” Mr Köse told Reuters.
The report said 75 countries eligible for grants and interest-free loans from the World Bank’s International Development Association (IDA) risked a lost decade of development without ambitious policy changes and significant international support.
Köse said that growth in many IDA countries had already started to decline before the COVID-19 pandemic, but that 2020-2024 will see the weakest half-decade of growth (3.4 per cent) since the early 1990s.
More than half of the IDA countries are in sub-Saharan Africa, 14 in East Asia and eight in Latin America and the Caribbean. Thirty-one of these countries have a per capita income of less than $1,315 per year. These include the Democratic Republic of Congo, Afghanistan and Haiti.
Conversely, in addition to the ‘tactical’ considerations that the Fed must take into account when determining its interest rate policy, fluctuations in bond markets indicate that a significant rethink may be required regarding the eventuality of interest rates once the latest inflationary wave has passed.
The two-year US Treasury yield, which is highly sensitive to short-term Fed policy, has risen in recent months as might be expected. However, longer-term yields have followed the same pattern.The 10-year US Treasury bond, which stood at 3.87% at the beginning of February, was yielding 4.63% two days ago.With the exception of a few weeks last autumn, long-term yields have not been this high since 2007.
In 2009, when the economic crisis was devastating the global economy, long-term Treasuries offered higher yields than in 2016, when they were ‘reasonably healthy’. The consensus view at the Fed was that a policy of 5 per cent or higher interest rates would constrain economic activity and put inflation on a downward path.Inflation data and bond market behaviour undermine this view. There is a widespread view that high interest rates may not be as much of a drag on the economy as had been thought, but rather reflect a ‘new normal’.
