Interview: Global inflation progress "could be reversed" amid Red Sea tensions: IMF official-Xinhua

Interview: Global inflation progress "could be reversed" amid Red Sea tensions: IMF official

Source: Xinhua

Editor: huaxia

2024-02-02 10:59:30

by Xiong Maoling

WASHINGTON, Feb. 1 (Xinhua) -- An International Monetary Fund (IMF) official has warned that geopolitical tensions, especially with increased attacks on ships in the Red Sea, could spur global inflation again, reversing the hard-won progress.

"We had a positive surprise where growth went up and inflation came down. Part of that is because supply-side issues improved, leading to reduced delivery times for goods," Daniel Leigh, who heads the World Economic Studies division in the IMF's Research Department, told Xinhua in a virtual interview Tuesday.

"But now the risk is that some of that could be overturned, and there could be geopolitical shocks that slow down delivery times and make costs go up again," Leigh said.

Noting that 11 percent of world trade passes through the Suez Canal, Leigh said that the IMF is concerned that the worsening situation in the Red Sea could increase shipping costs, as it has already done.

The impact on inflation, he said, might be modest at current levels, but "there's a risk that it could become a problem for central banks that are already making progress towards that softer landing and create higher-than-expected inflation," he said.

The IMF on Tuesday upgraded the global growth forecast to 3.1 percent in 2024, 0.2 percentage points higher than the projection in October, according to its newly released World Economic Outlook (WEO) update.

The upward revision reflects upgrades for China, the United States, large emerging markets and developing economies, the IMF noted.

Nevertheless, the projection for global growth in 2024 and 2025 is below the historical (2000-2019) annual average of 3.8 percent, reflecting restrictive monetary policies and withdrawal of fiscal support, as well as low underlying productivity growth, the IMF said.

Leigh told Xinhua that there are short-term and long-term reasons for the below-average growth of the global economy.

"The short-term reason is that there's a fight against inflation still happening with very high borrowing costs, which by design cool down growth to tame inflation," he said.

Another factor is the huge increase in government debt. "We expect governments to start trying to curb that debt, raising taxes, trimming spending that weighs on growth in the short term as well," said the IMF official.

The longer-term challenges come from low productivity, Leigh said. The prolonged challenges stem from declining productivity over the past two decades, marked by a period of extensive globalization, supply-side reforms, and countries transitioning from lower to middle-income.

As nations ascend the income scale, the natural slowdown in growth is compounded by a diminishing focus on implementing crucial reforms, which saps productivity, he said.

Leigh, as well as some other IMF officials, have repeatedly warned of the cost of fragmentation in the global economy. The division of the world economy into geopolitical blocks "has the potential, if it continues, to seriously reduce global prosperity," he said.

IMF research shows that costs could range from 3 percent of world GDP to 7 percent of world GDP, with emerging and developing countries to be most adversely affected by trade-distorting measures.

"But it's not just trade. There's also investment flows," Leigh said, noting that if the divisions intensify, efficiency will decline, preventing optimal productivity and diminishing global output.

There's also the channel of the commodities markets, especially in the context of the green transition, said the IMF official, adding that some of these metals, such as cobalt and nickel, are very concentrated in a few countries.

"If the wall goes up, and those countries are not on your side of the wall, it's going to be much more expensive for you to get or even could really slow down the green transition," he said. "So this is why we (are) so concerned about fragmentation."

According to the WEO update, growth in China is projected at 4.6 percent in 2024, with an upward revision of 0.4 percentage points since October 2023.

The main source of this upgrade, Leigh said, is derived from the new government spending package, which includes investments in infrastructure to enhance the economy's resilience to climate disasters.

Noting that the Chinese government has already provided policy support, the IMF official said that there's more that could be done in terms of speeding up the restructuring of developers in the property sector.

Boosting confidence for those who have already paid for their apartments and ensuring they will receive their property will elevate optimism and encourage consumption, he added.