The paradox of a fragile and resilient global economy

IMF writers were clearly in a gloomy mood when they addressed the Fund’s latest World Economic Outlook report. The phrase “the global economy is in flux, and the outlook remains bleak” is not cheerful. The year the United States raised tariff levels to their highest levels in a century Adds new threats Whenever something upsets President Donald Trump, you wouldn’t expect the IMF to be optimistic. But it’s an exaggeration.

The more accurate conclusion is that the global economy is both resilient and fragile at the same time. This is the paradox that central bankers and other economic policymakers must address.

Resilience

The most notable advantage of the global economy in 2025 is its ability to withstand trade shocks. Although families in the rich world do as well Very bleakThe Brookings-FT Tiger Composite Indices indicate that most real and financial indicators in advanced and emerging economies are performing better than usual.

As Eswar Prasad, a senior fellow at the Brookings Institution, said: “Economic growth has been surprisingly stable in most parts of the world, despite the enormous uncertainty surrounding global trade and geopolitical conditions, as well as the various short-term and looming long-term pressures that every economy faces.”

This unexpected strength is reflected in the latest IMF forecasts. Compared with the last full forecast in April, global economic growth in 2025 was revised 0.4 percentage points to 3.2 percent, exactly the level the IMF had forecast a year ago and a year ago.

Almost every country saw improvements in growth forecasts for this year, many of them significant. Part of the improved outlook is because retaliation against Trump’s tariffs was lower than feared, meaning their effect was essentially a tax on US imports. The rest of the upgrade was the result of strong financial markets, adjustment in the private sector, and strong economic policies.

The IMF is so encouraged by economic policymaking in emerging markets that it devotes a chapter to its success. He – she He finishes Better policies “played a crucial role in enhancing the ability of emerging markets to withstand risk-off shocks,” he added, adding that they showed “remarkable resilience” during the Covid-19 pandemic and the subsequent inflation shock.

But this celebration needs some context. Just two years ago, the International Monetary Fund highlighted that economic activity in emerging markets was well below pre-pandemic expectations, and that… They faced much greater scarring of Covid-19 compared to advanced economies.

When it comes to the IMF, narrative trumps consistency.

The IMF overestimates global vulnerability

The story the IMF wants you to believe in 2025 is this: Before the pandemic, the global economy was on pace with average annual growth of 3.7 percent. Now, economic activity is expected to rise at an annual rate of just 3 percent In the medium termIt is a “crucially” lower level and will usher in “persistently lackluster” output growth throughout the remainder of this decade.

Unfortunately, this new narrative is based on a few choice statistics. The numbers are correct, but they are not fair.

The fact is that the average growth rate before the pandemic was 3.4% when using the full set of data in the IMF database, not 3.7%. The higher number is based on giving much greater weight to the boom years that preceded the global financial crisis and limiting the sample to the period 2000-2019. The future growth rate of 3% in the medium term is tied to the average over six quarters, starting from the second half of 2025 to the end of 2026. It then returns to an average of 3.2% per year, which is barely below the long-term average.

Disappointment, not fragility

It is difficult to understand why the IMF continues to underestimate the strength of global economic activity, because the full truth is easy to explain. Growth rates are holding up because emerging economies account for a growing share of global output and have been growing faster than advanced economies for decades.

But while this feature of the global economy maintains the overall rate of expansion, it also allows all regions to be disappointed with their performance.

As the chart below of successive IMF forecasts shows, medium-term growth expectations in advanced economies have fallen from about 3 percent in the 1990s to less than 2 percent. Annual growth rate expectations for emerging economies rose in the 1990s and 2000s. But since the global financial crisis, this percentage has fallen from more than 6 percent to 4 percent.

The irony here is that everyone is disappointed. But because the global economic center of gravity has moved decisively toward the fastest-growing emerging economies, the global growth rate remains roughly constant.

Real fragility

To give a comprehensive view of the global economic backdrop, an analysis of countries’ growth rates since the global financial crisis must be combined with evidence indicating real economic fragility.

Trade policy is in flux, as evidenced by China’s announcement of export controls on rare earth elements last week and Trump’s angry response. Like everyone else, the IMF is concerned that the investment boom in artificial intelligence and the associated increase in financial market stocks may be a bubble. Fiscal policy is loose globally, and financing pressures are beginning to emerge, even if they are suppressed by rising yields. Japan and the United States in particular have very high financing needs, given the size of their public debt and its short average maturity.

As IMF Managing Director Kristalina Georgieva said, “Given these problems, it is time for policymakers.”Home arrangement“On this matter, the IMF is absolutely right.

What I was reading and watching

• Natasha Vala, a former senior official at the European Central Bank, is concerned about the situation in France Financial and political problems The central bank will soon be tested.

• In the past, it was difficult to prevent UK consumers from spending their money. Now they have They become wise saversconfusing everyone.

• The Nobel Prize in Economics goes to Joel Mokyr, Philip Aghion, and Peter Hewitt for explaining it Innovation-based growth.

• On the other hand, US Treasury Secretary Scott Besent was questioning the Federal Reserve chairmanship candidates about quantitative easing. He wants less of it.

One last chart

A few days before the International Monetary Fund became concerned about financial fragility, the US Congressional Budget Office published the first result of the budget for the fiscal year 2025, which ends in September.

The chart below shows financial fragility in the United States in gory detail. Net debt interest represents more than 15 percent of tax revenues, which is back to the level of the 1980s and 1990s. But at the time, debt was much lower as a share of GDP. The risk here is that market interest rates would rise to higher levels, which would make servicing US debt more expensive.

Central Banks is edited by Harvey Nyriabia