IMF's Georgieva says global economy weathering energy shock, sees fiscal concerns

The International Monetary Fund's Managing Director, Kristalina Georgieva, stated on Tuesday that the global economy has better managed the Iran war energy shock than initially anticipated, but she expressed concerns about fiscal issues in certain countries. These concerns are highlighted by rising bond yields and a lack of progress in disinflation.

Georgieva discussed these matters during a briefing prior to the upcoming Group of 20 finance leaders meeting in Asheville, North Carolina. She noted a "tug of war" between the negative impact of the Gulf energy supply shock and the growth benefits from the artificial intelligence investment boom, which is spreading beyond the United States.

Georgieva mentioned that while the outlook risks are more balanced than in April, they still lean towards the downside due to mounting fiscal pressures and the possibility that central banks may need to maintain tight monetary policy to curb inflation. Despite the challenges, global growth has been resilient against high debt levels, persistent inflation, and trade tensions, largely due to factors such as oil and gas reserve drawdowns by various nations, increased non-Gulf energy supplies, lower energy demand, expanded renewable energy capacity, and a resurgence of coal power generation in some areas.

The artificial intelligence investments in the United States are also contributing to strong corporate earnings and consumer spending, along with other countries ramping up data-center construction and AI hardware manufacturing. However, Georgieva cautioned against complacency among policymakers, emphasizing that the energy shock is not yet over.

She warned that a potential rise in oil prices could further fuel inflation, compelling central banks to keep a restrictive policy stance, which could have adverse effects on debt service costs and economic activity. Georgieva urged all countries to address their fiscal problems and develop credible plans to ensure their debt and deficits are sustainable in the long run.

She did not point fingers at any specific countries but echoed previous calls for the United States to reduce its growing fiscal deficits, which would also help alleviate the US trade and current account deficits. Georgieva emphasized that central banks must remain focused on their price stability goals, despite the ongoing inflation risks, and stressed the need to tackle excess global imbalances that are causing trade tensions.

She did not specify particular countries but reiterated her belief that a more balanced economy would lead to a stronger global economy, benefiting everyone. The IMF is refining its model for evaluating external balances and will delve deeper into the drivers of these imbalances, including the interplay of macroeconomic trends, trade, and industrial policy, in upcoming papers.