IMF chief warns world economy faces an ‘obstacle course’ this year

The head of the IMF said that the global economy would have to navigate an “obstacle course” this year with the ongoing pandemic and geopolitical tensions deepening a global inflation problem.

Speaking on Friday at the virtual World Economic Forum held instead of the normal in-person gathering at Davos, Kristalina Georgieva warned that the outlook for the global economy this year would be far from smooth.

“[The year] 2022 is like navigating an obstacle course,” the fund’s managing director said. “We anticipate the [global] recovery to continue but it is losing some momentum and it is faced with the renewal of [Covid-19] infections . . . much more persistent than anticipated inflation and . . . record high debt levels.”

With an eye to the worsening tensions between Russia and Ukraine, Georgieva said that many of the causes of inflation were not simply explained by levels of spending and demand being too high compared with global supply capacity.

Commenting that inflation was not just a problem that central bankers could fix, the IMF head added that “the pressure on prices comes from food prices shooting up [caused] to a certain degree because of [the] climate . . . and energy prices shooting up, and this is a very complicated story in which there is also an element of geopolitical tensions”.

Georgieva said the US Federal Reserve was “acting responsibly” in its tightening of monetary policy, and was balancing the need to fight rising prices and protect the recovery at a time when “inflation in the US is turning into an economic and social concern”.

However, higher US interest rates would hit some countries, especially those with high levels of dollar denominated debt, which “could throw cold water on what for some countries is already a weak recovery”.

Georgieva urged them to act quickly. “If you have currency mismatches, now is the moment to address them,” she said.

Noting China’s slowing economy, Georgieva said this was a concern for the rest of the world in 2022 and that Beijing should think about both loosening policy to encourage growth and whether its zero-Covid policy was still optimal given the more contagious Omicron variant.

“What Omicron is teaching all of us is that it is a highly transmittable variant of Covid and may be much more difficult to contain without a dramatic impact on the economy and our view is that this has to be taken into account,” she said.

“We will see how China integrates this message, both in terms of the policies they apply but also in terms of how they advance on the direction of what are the vaccines that are most effective and how that would be integrated [into] China’s [policies to control infections].”

The IMF will publish its latest forecasts for the global economy on Tuesday next week.