How to avoid a global recession, according to the head of the IMF

The war in Ukraine has triggered a humanitarian crisis and set back the global economy's recovery from the COVID-19 pandemic, according to the latest International Monetary Fund (IMF) World Economic Outlook released in April 2022.

It projects global growth will slow from an estimated 6.1% in 2021 to 3.6% in 2022 and 2023. While the impact of the war on commodity prices and other price pressures see inflation projections of 5.7% in advanced economies and 8.7% in emerging market and developing economies - 1.8 and 2.8 percentage points higher than projected in January.

Speaking in Davos, the IMF's Managing Director, Kristalina Georgieva, told the World Economic Forum Annual Meeting that the world needs to stay focused and strive for peace in Ukraine to avoid a global recession.

"We are experiencing a crisis upon a crisis. First the pandemic, now the war in Ukraine. And that is a major setback for the recovery of the world economy," said Georgieva.

"As a result, we had to downgrade 143 countries for their growth prospects for 2022 and bring global growth from 4.9, where we projected it in October last year to 3.6 where it is today. And on top of it, we see a very significant acceleration of inflation in many, many countries."

Central banks have to take decisive action to bring back price stability, but when they tighten financial conditions, for everybody that has a burden of debt, the ability to service this debt is more expensive, she added.

"For many countries, 2020 was the year of increased debt and that particularly applies for low-income countries where today 60% of them are either at debt distress or next to it. With high interest rates, the conditions would be very difficult.

"What we also face is significant increase of commodity prices, mostly because of the war in Ukraine. And that is terrible when it comes down to price of food for poor people and especially poor people in poor countries.

"And last but not least, we need to recognize that the Chinese economy has slowed down mostly because of lockdowns related to the pandemic. And the slowdown of growth in China has negative impact on the region and on the world.

"And that adds to the downside risks for 2022. We must stay focused on overcoming the root causes for these problems. And of course, on the top of the list is to strive for peace in Ukraine."

Central banks have an obligation to communicate very clearly, so they build expectations for businesses and consumers, said Georgieva.

"They also need to keep their hand on the pulse of the economy, to be able to quickly adjust, should that be necessary, to prevent recession in the future.

"They need to work hand in hand with fiscal authorities, with the finance ministries. Central banks are independent, this is a huge advantage. But fiscal policy and monetary policy in this environment really need to go hand in hand.

"What does that mean? For fiscal policy to pay attention to the most vulnerable: vulnerable people, vulnerable businesses, and to narrow down protection support to those who most need it so we can steer through this period of time with avoiding recession, if not in all countries, but in most countries."

The IMF is at its best when the world economy is at its worst, said Georgieva.

"We are an institution that steps up at the time of a crisis. In 2020, we stepped up emergency financing and we provided lifelines to countries that were facing the shock of putting their economy to a standstill.

"Today, we have extended nearly $300 billion in lending. But we also did something unique. We provided $650 billion in Special Drawing Rights (SDR), a reserve asset that the IMF can create on the strength of its 190 membership. And that has been a major injection of liquidity, especially valuable for the poorest countries.

"Now we are taking some of this SDR from countries that have it, don't need it, to only lend to countries in need.

"What we can do for countries? One: provide objective, non-biased assessment of their economic situation and the policies they should pursue. Two: provide very valuable financial support. And we still have $700 billion capacity to lend should that be necessary.

"And the third is very important. Bring the whole membership together so countries can see not only their own picture, but how that fits in the developments in the world and provide a highly valuable platform for cooperation and coordination, even more important in a world that is faced with an increased risk of fragmentation."

We need to look back at what international cooperation has brought to the world, said Georgieva.

"Over the last 30 years, [cooperation] has brought a massive decrease in poverty from 2 billion people to 650 million today. That's 650 million too many, but a massive decrease. It has tripled the world economy and it has made hundreds of millions of people better off as a result.

"When you look forward, we need to learn a very important lesson from the globalization of the past. It did not work for everyone and therefore the future ought to be about making benefits localized for communities and being much more mindful that it is not about global profits, it is about local benefits.

"When we look into the future, remember: they are problems that no single country can resolve on its own. Climate, cross-border payments, being able to operate as a world, tackling the challenge of debt and also lifting up the capacity of countries and communities to make lives of people better, because we drive on the comparative strength of each and every one of us."