Risks to financial stability have increased but ‘green shoots’ are appearing, IMF says

China is set to account for about a third of global growth in 2023, boosting the global economy

IMF Managing Director Kristalina Georgieva, at the China Development Forum in Beijing. Reuters

A banking crisis in the US and Switzerland and the pivot to higher interest rates to fight inflation have increased risks to financial stability, but there are “green shoots” appearing, especially in China, that are positive for the world economy, the International Monetary Fund's managing director has said.

“Policymakers have acted decisively in response to financial stability risks, and advanced economy central banks have enhanced the provision of US dollar liquidity. These actions have eased market stress to some extent, but uncertainty is high, which underscores the need for vigilance,” Kristalina Georgieva said in a speech on Sunday at the 2023 China Development Forum.

The fund, which holds its joint Spring Meetings with the World Bank next month in Washington DC, is monitoring developments closely and assessing potential implications for the global economic outlook and global financial stability, particularly for the most vulnerable and low-income countries with high debt levels, she said.

The IMF still expects growth of the global economy below 3 per cent due to “scarring” from the Covid-19 pandemic, the Ukraine war and monetary tightening, Ms Georgieva said.

In its January World Economic Outlook, the IMF raised its global economic growth estimate for this year by 0.2 percentage points to 2.9 per cent from its October forecast, a slowdown from 3.4 per cent in 2022.

The fund expects the global economy to rebound to 3.1 per cent in 2024, below the historical average of 3.8 per cent over the 2000-2019 period.

The IMF will release a detailed assessment of the global economy and growth forecasts during its April 10-16 meetings.

Ms Georgieva was upbeat on the reopening of China's economy and rebound of economic activity in the world's second largest economy.

In its last forecasts, the IMF estimated gross domestic product in China would grow 5.2 per cent in 2023, 2 percentage points higher than in 2022. Growth rebounded to 8.4 per cent in 2021 following a deceleration after the Covid-19 pandemic in 2020.

“Here the economy is seeing a strong rebound … driving this growth is the anticipated rebound of private consumption as the economy has reopened and activity has normalised,” she said.

“This matters for China, and it matters for the world. The robust rebound means China is set to account for around one third of global growth in 2023 — giving a welcome lift to the world economy.”

The fund estimates that a 1 percentage point increase in GDP growth in China leads to 0.3 percentage point increase in growth in other Asian economies, on average.

In February, Goldman Sachs said the reopening of China’s economy and a full recovery in the country's domestic demand may raise global output by about 1 per cent this year and lead to a rally in oil prices.

Regional Asian economies and oil exporters are likely to be the biggest winners from China’s reopening, but it also should provide a healthy boost to GDP levels in most economies, the global investment banking and securities firm said.

“With such a solid recovery, China can now build on positive momentum and — through comprehensive policies — stay on the growth path towards convergence with advanced economies,” Ms Georgieva said.

Raising productivity and rebalancing China's economy away from investment and towards more consumption-driven growth that is more durable is an important priority for Beijing, the fund's director said.

China's social protection system will need to play a central role by providing higher health and unemployment insurance benefits to help cushion households against shocks, she said.

“At the same time, market-orientated reforms to level the playing field between the private sector and state-owned enterprises, together with investments in education, would significantly lift the economy’s productive capacity,” Ms Georgieva said.

IMF research shows that productivity-enhancing reforms in China could lift real GDP by as much as 2.5 per cent by 2027 and by about 18 per cent by 2037.

The implementation of such policies can also help offset demographic pressures and narrow faster the gap to advanced economy income levels, Ms Georgieva said.

China's goal of achieving net-zero emissions by 2060 will help reduce its vulnerability to global warming effects, according to the fund.

Last year severe droughts reduced hydropower output and put pressure on the power sector, and temperatures in China are rising faster than the global average, bringing increased risks to its economic growth.

Unmitigated warming could lead to estimated GDP losses in China of between 0.5 and 2.3 per cent as early as 2030, according to IMF estimates.

Measures to rebalance the economy will help China achieve its climate goals, reducing its carbon dioxide emissions by 15 per cent over the next three decades, which in turn would lower global emissions by 4.5 per cent over the same period, it said.