[Economics] Finance chiefs differ on risks to the global economy

[#Wittels-]

The heads of global finance, meeting in Washington just over a year after Russia's shock invasion of Ukraine, drew very different conclusions about the heightened risks to the outlook, in a split that shows the growing role of geopolitical strife in the worldwide economy.

(Bloomberg Opinion) -- The world's finance chiefs, meeting in Washington just over a year after Russia's shocking invasion of Ukraine, came to far different conclusions about the biggest risks to the outlook, in a split that shows the growing role of geopolitical struggles in the world economy.

The main takeaway among wealthy, democratic nations is the need for greater “resilience” in supply chains, to ensure that their economies are better insulated from risks ranging from wars and pandemics to coercive attempts by authoritarian systems. But others, like the International Monetary Fund, warned against a "fragmentation" of the world economy into rival blocs that would hurt growth.

Finance ministers and central bank governors from the Group of Seven invoked the terms "resilient" and "resilience" a total of 15 times in their joint statement after meetings on Wednesday.

 

“All countries are going to want to have more resilient supply chains in a much less stable world; the lesson from Ukraine was that energy dependence on Russia was probably a mistake,” British Chancellor of the Exchequer Jeremy Hunt told reporters on Thursday. “We want to make sure that not only energy dependency is addressed, but also technological dependency, critical mineral dependency and all kinds of dependencies,” he added.

German Finance Minister Christian Lindner, Hunt's G7 colleague, described the danger as “cluster risk”, that is, over-reliance on trade and investment in one place. Trade relations with China, for example, “must not become a cluster risk; that is why diversification is necessary,” he told reporters on Thursday.

But the danger of this new push by democratic economies to shift supply chains inward—something US Treasury Secretary Janet Yellen calls “friendshoring”—is the splitting of the global economy into blocs, which leads to less efficiency and ultimately less development.

 

This was warned by Kristalina Georgieva, managing director of the IMF, which together with the World Bank celebrates the spring meetings of those responsible for world economic policy this week in the US capital.

The security of global supply chains "is taking on a new priority" in economic debates and decision-making, Georgieva told reporters on Thursday. "The question is whether we can be more determined to improve the security of supplies, but without pushing the world so far as to lead to a second cold war."

While “resilience” is the new mantra for the US and its allies, “fragmentation” is the feared outcome among those watched, including Georgieva. “Going on a path of less fragmentation in the world economy is good for everyone,” he declared last week.

Speaking on Bloomberg Television's “Wall Street Week” with David Westin on Friday, former US Treasury Secretary Lawrence Summers will claim that “there is a growing acceptance of fragmentation”. “Perhaps most worryingly, there is a growing sense that ours is not the best snippet to associate with,” said Summers, a Bloomberg TV contributor.

The main source of this fragmentation risk is the increasing tensions between the US and China, the first and second world economies.

 

"That's the key relationship in the world" and "it's fracturing," former IMF chief economist Raghuram Rajan said on Bloomberg Television on the sidelines of the meetings on Thursday. "That's important to the rest of the world, because if you have to choose sides, countries will find themselves in a very, very difficult position."

That position did not go unnoticed by Morocco's finance minister, Nadia Fettah Alaoui.

"Countries like Morocco will suffer fragmentation," he said on Thursday. “We have to push to avoid it.”

No more 'Chinese'

To make matters even worse, the growth trend of the world economy is much weaker. This is partly because major countries such as China, Japan and some members of the Eurozone are experiencing a decline in the working-age po[CENSORED]tion. Productivity growth rates have weakened compared to past decades. And the IMF also warned this week that high debt levels make the world more vulnerable.

While China's reopening this year features a burst of growth that may help sustain global expansion, its medium-term trend pace of 5% or below is certainly below pre-pandemic rates.

“We no longer have any China growing at very high rates,” Gita Gopinath, who is now Georgieva's top lieutenant after serving as IMF chief economist, told Bloomberg TV. "So, for the global economy as a whole, we don't have very large growth engines."

“The IMF is absolutely right, long-term growth looks much worse,” Rajan said.

All the worse that, according to the IMF, the five-year world outlook is the worst of its projections, which go back to 1990. That year was effectively the end of the last Cold War: a year before the collapse of the Soviet Union, which it contributed to the rapid integration of formerly communist nations into a new, rapidly globalizing economy.

Today, intensifying geopolitical competition is also manifesting itself in the battle for investment dollars and disputes over debt.

Limited progress was made at the Washington meetings on the economy resolving debt overhangs in Zambia and other borderlands, as China, the developing world's largest official creditor, is reluctant to accept terms insisted on by members of the G7.

Chinese movements

China, by contrast, is focused on bolstering its own supply chains and financial ties with the developing world, an impetus highlighted this week by hosting Brazilian President Luiz Inácio Lula da Silva.

 

Amid deadlocked debt negotiations in Washington, Shanghai witnessed the inauguration of one of Lula's predecessors, Dilma Rousseff, as head of the New Development Bank. The NDB, as it is known by its acronym in English, is one of the many multinational institutions and forums that China has created in a move that places less importance on legacy organizations created in a time of US rule.

Back in the US capital, the fracture in the world order was also evident in the inability of G20 finance ministers to issue a statement, continuing the discord the group has faced since Russia's invasion of Ukraine.

Some policymakers in the developed world are vigilant about risks, even as they try to change supply chains. French Finance Minister Bruno Le Maire said, "We need a common strategy to avoid such fragmentation and keep the door open for stronger cooperation."

 

Link: https://www.infobae.com/america/agencias/2023/04/18/jefes-de-finanzas-difieren-sobre-riesgos-para-la-economia-global/