Global growth will remain low in the coming years – 04/10/2023 – Market

Even with the resilience of the consumer market and the economic reopening of China, global growth should not only remain at low levels, but will remain so for the next five years, said this Monday (10) the director general of the International Monetary Fund, Kristalina Georgieva.

The institution predicts that global growth will remain below 3% over the next five years, said the economist at the opening of the week of meetings between the organization and the World Bank, which brings together economic authorities from around the world in Washington. According to Georgieva, this is due to high global inflation, which makes central banks continue to raise interest rates.

“We saw a rapid transition from low interest rates and abundant liquidity to high interest rates and much lower liquidity, which exposed financial sector vulnerabilities that made the task of policymakers even more difficult,” she said.

World Bank President David Malpass exemplified the problem with the failure of Silicon Valley Bank in March. The bank had more than half of its assets invested in long-term government bonds bought in a period of very low interest rates, which have fallen in price as rates have risen.

“Artificially low interest rates and the capital allocation that went with them led the whole world to make decisions based on the idea that there would be 0% interest rates for a long period of time, and they made misallocations of capital. Back to productive levels is very difficult. Raising interest rates to more normal levels means losses for banks,” he said.

Malpass made the caveat, however, that keeping interest rates low will not solve the problem because it weakens the dollar and increases inflation, “and that hits the poor the hardest,” he said.

He argued that more than trying to reduce demand by raising interest rates to control inflation, it is necessary to think about long-term solutions by increasing supply, which means, in the short term, financing small and medium-sized businesses.

A study released this Monday by IMF economists, however, pointed out that the increase in real interest rates tends to be temporary. “Once inflation comes back under control, central banks in advanced economies are likely to ease monetary policy and bring real interest rates back to pre-pandemic levels,” write economists Jean-Marc Natal and Philip Barrett.

How close to pre-pandemic levels will depend on countries’ debt and public deficit levels. “In large emerging markets, conservative projections of future demographic and productivity trends suggest a gradual convergence towards real interest rates in advanced economies.”

Malpass said at the opening of the event this Monday that developing countries are out of the flow of capital and are experiencing a phase of decapitalization. One of the concerns is with the high prices of food and fertilizers, he said, which makes it more difficult for producers in poor countries to plant.

Countries such as China have substantial wheat stocks, but most nations have exhausted their reserves, sending a shock to the global food supply chain.

Malpass and Georgieva highlighted the problem of the fragmentation of global trade based on geopolitical blocs, with a deglobalization that can cost up to 7% of global GDP over the years, according to the IMF.

“The integrated economy that has generated tremendous momentum for growth and prosperity over the past three decades is being negatively impacted,” said Georgieva.

Also of concern on the global stage, she said, is divergent economic growth, in which the per capita growth of poor countries is lower than that of middle-income countries.

A World Bank report released last week pointed out that Brazil should grow 0.8% this year, below the Latin American average of 1.4%, which will already be the lowest regional rate in the world.