Finance ministers and central bank governors gathered for the IMF annual meeting in Bangkok are not dealing with a full-blown crisis, which is something of a miracle given the year's challenges. Two regional wars, an energy shock, rising inflation, and US-China trade tensions have all threatened growth, yet the impact has been modest so far.
The IMF is right to say countries have shown resilience in coping with many headwinds, and it could have been worse. The UK received some good news, with the IMF upgrading its growth forecast and praising the government's deficit-reduction plan.
Three key reasons for robust growth
The better-than-expected performance breaks with historical precedent, as oil shocks of this magnitude have usually had a marked impact. Three key reasons explain the robust growth and muted inflation: massive investment in artificial intelligence, particularly in the US, the fastest-growing G7 economy; countries drawing on oil inventories to alleviate crude losses from the Middle East; and China's strategy of exporting cheap goods, which bears down on import prices elsewhere.
Despite these factors, potential flashpoints are everywhere. The Middle East conflict is spreading to Saudi Arabia, oil stocks are running low, and US investment in AI has pushed up borrowing costs and caused capital shortages for non-AI sectors. Governments face pressure to rein in spending or raise taxes to impress bond markets.
Warnings of tighter fiscal policy
IMF head Kristalina Georgieva and Bank of England governor Andrew Bailey have warned of the need for tighter fiscal policy, but voters want politicians to do more, not less. There is little appetite for a new era of austerity, and finance ministers know it. If they deliver painful measures, the backlash is likely to be brutal.
Governments also need to boost national self-sufficiency at a time when global supply chains are stretched, as highlighted by student protests in India and France. Yet the capacity of states to act effectively is much weaker than they care to admit.
Multilateralism in retreat
With globalisation in retreat, a strong system of multilateral cooperation is needed, but that is not currently the case. The WTO is moribund in this new age of protectionism, and the IMF and World Bank are reluctant to call out Trump's erratic behaviour. The problems of multilateralism run deeper than any single president, as the liberal world order was dysfunctional long before Trump arrived.
Richard Kozul-Wright, a former UN official, points out in a paper published next month that the IMF and World Bank, created at the 1944 Bretton Woods conference, have lost their connection to New Deal principles. Instead, they have pursued an agenda that encourages footloose capital, bolsters private profit, and reduces policy space for governments, acting as hand maidens to rising inequality and debt distress.
The IMF's own programmes illustrate this lack of policy space, with help coming with strings attached: frontloaded tax increases and spending cuts, with half implemented in the first year and two-thirds within two years. The IMF argues this tough love has a higher chance of success, but success primarily means a borrowing country doesn't need another programme in three years, not that living standards are improving or poverty is falling.
Returning to New Deal principles would give governments more policy space, boost public investment, and help poorer countries cope with the climate crisis, but none of that has a chance of happening soon. As a result, the world will become hotter, more fractured, more prone to conflict, less equal, and a lot angrier.
The IMF is worried that the limits of this resilience may soon be tested, and it is right to be worried. Peace in the Middle East would bring oil prices tumbling, but unless that happens quickly, a long winter lies ahead. This looks more like a crisis postponed than a crisis permanently avoided, a lull before the storm in all probability.
