Inflation cooled in June to slowest pace in more than 2 years. Inflation dipped in June to its slowest pace in more than 2 years, indicating price increases are cooling amid the Federal Reserve's rate-hiking regime. (CBS)

China's economic woes may help lower US inflation. The People's Republic, the world's second-largest economy, continues to struggle to shake off COVID-induced woes, leaving it tottering on the brink of deflation. (Axios)

The American banking landscape is on the cusp of a seismic shift. Rising interest rates, losses on commercial real estate and heightened regulatory scrutiny will pressure regional and midsized banks, leading to a wave of mergers. (CNBC)

A falling Rhine River is lifting transport costs as heat persists. Water levels on Europe’s most important river are falling again, threatening a repeat of last year’s supply-chain crunch and higher transport costs for companies that rely on the Rhine for trade. (Bloomberg)

Retailers, beware: Resumption of student loan payments could lead some buyers to pull back. Just as the American economy is struggling with high inflation and interest rates, the coming resumption of student loan payments poses yet another potential challenge. (AP)

US economic growth last quarter is revised up sharply to a 2% annual rate. Showing surprising resilience in the face of higher interest rates, the U.S. economy grew at a 2% annual pace from January through March as consumers spent at the fastest pace in nearly two years. (AP)

Spain’s snap election: Will the Sánchez gamble pay off? After his party’s severe losses in regional and local polls in May, Spain’s Prime Minister Pedro Sánchez brought forward the national vote by four months. (Al Jazeera)

UK economy 'listless' with little growth in four years. The U.K. economy has barely grown since 2019 before the pandemic, with one economist describing it as “listless.” (BBC)

IMF approves long-awaited $3bn Pakistan bailout. The International Monetary Fund's (IMF) board has given its approval for a $3bn (£2.3bn) bailout for Pakistan. (BBC)

The federal deficit nearly tripled, raising concern about the country's finances. The federal government's deficit nearly tripled in the first nine months of the fiscal year, a surge that's bound to raise concerns about the country's rising debt levels. (NPR)

Time to make banks more stressed? For over a decade, the Federal Reserve has assessed the health of the financial system via an annual stress test for large banks. (NPR)

Chinese military’s three-day show of force increases headache for Taiwan. China’s military has been on a surge of activity around Taiwan this week, sending dozens of warplanes past the median line of the Taiwan Strait and into the key regions of the island’s air defense identification zone. (CNN)

Yamuna River surpasses height record as northern India reels from deadly floods. A major river overflowing near India’s capital has reached the highest level on record, authorities said, prompting mass evacuations and causing havoc with water supplies as northern states report rising deaths from heavy flooding. (CNN)

Critical moment for Thai democracy as parliament fails to elect new prime minister. The sole nominee to be the next prime minister of Thailand failed to secure enough parliamentary votes to form a government Thursday, a setback for the future of democracy in the country following nearly a decade of turbulent military-backed rule. (CNN)

Weak Global Economy, High Inflation and Rising Fragmentation Demand Strong G20 Action

Kristalina Georgieva, IMF Blog

When the G20 finance ministers and central bank governors meet in Gandhinagar next week, the world will be looking for joint action to address rising economic fragmentation, slowing growth and high inflation. Agile multilateral support is vital to tackle common challenges posed by debt vulnerabilities, climate change and limited concessional financing—especially for countries hit by shocks not of their making.

Outlook: Resilience Amid Challenges

In April, the IMF projected global growth at 2.8% in 2023, down from 3.4% in 2022. The bulk of it—over 70%—is expected to come from the Asia-Pacific region.

Yet, recent high frequency indicators paint a mixed picture: weakness in manufacturing contrasts with resilience in services across the G20 countries and strong labor markets in advanced economies. At the same time, financial fragilities uncovered by tight monetary policy require careful management—particularly as restoring price stability remains a priority.

Global headline inflation seems to have peaked, and core inflation has eased somewhat, particularly in India. But in most G20 countries—especially advanced economies—inflation remains well above central banks’ targets.

Tackling Inflation and Boosting Growth

In the fight against inflation there are some early signs of monetary policy transmitting to activity, with bank lending standards tightening in the euro area and the United States. That said, policymakers should avoid “premature celebrations”: lessons from previous inflationary episodes show that easing policy too early can undo progress on inflation.

That’s why it is vital to stay the course on monetary policy until inflation is durably brought down to target, while closely monitoring financial sector risks. Here, clear central bank communication and financial sector oversight are needed to reduce the risk of disruptive shifts in financial conditions.

Fiscal policy must also play its part. Tightening the purse strings after a period of pandemic-related exceptional support can support disinflation, rebuild buffers and enhance debt sustainability, while temporary and targeted measures may be needed to help vulnerable people cope with the immediate cost-of-living crisis.

At the same time, consolidation efforts should protect growth-enhancing investments where space allows. Why? Because while prospects are mixed in the near term, the medium-term outlook for the global economy remains bleak.

The IMF forecast for global growth over the medium-term is around 3%—well below the historical average of 3.8% during 2000-19. Moreover, economic fragmentation will both undermine growth and make it harder to tackle pressing global challenges, from rising sovereign debt crises to the existential threat of climate change.

The Importance of Joint Action

The good news is that we have seen how the international community can deliver when differences are set aside.

In June, we saw the breakthrough on Zambia's debt restructuring. That was a significant milestone for the G20 Common Framework which was born out of efforts from the country authorities as well as both Paris Club members and other countries such as China, India and Saudi Arabia. The agreement unlocks further financing as part of the $1.3 billion IMF arrangement agreed in August 2022.

In addition to progress on debt restructuring for Chad, this outcome also builds on trust and better understanding among creditors and debtors ushered in through the Global Sovereign Debt Roundtable.

But the work is not yet done. More effort is needed to accelerate the debt restructuring process through clear timelines, debt service suspension during negotiations, and improved creditor coordination on debt treatment for countries outside the Common Framework.

The G20 last month also announced the achievement of the $100 billion in pledges of special drawing rights (SDRs) to be channeled from richer to poorer countries. Set by the G20 in the wake of the IMF’s record $650 billion allocation of SDRs in 2021, meeting this target is a strong signal of broad international solidarity. We should also take inspiration from members who lifted the ambition of their pledges for SDR channeling: France and Japan to 40% of their allocations, and China to 34%.

Such exceptional generosity has allowed the IMF to do even more for our members. Around $29 billion in SDRs pledged to the Poverty Reduction and Growth Trust (PRGT) since 2020 is helping us deliver higher and larger financial support to low-income countries at zero interest.

Moreover, some $42 billion in SDRs have already been provided to the IMF’s Resilience and Sustainability Trust (RST) that was launched last year. Nine members have had their RST funding approved and dozens more have submitted requests.

Programs under the RST will support climate reforms, such as integrating climate considerations into fiscal planning in Costa Rica and strengthening climate-related risk management for financial institutions in Seychelles. And in Rwanda and Barbados, resources from the RST are complementing support from multilateral development banks which together are expected to catalyze additional financing from the private sector, including private investment in climate projects.

Supporting Vulnerable Countries

Important as these milestones are, however, they alone are not enough.

Many vulnerable emerging market and low-income economies are at the sharp end of multiple shocks and fundamental transitions.

Take climate change, where they have contributed very little to the problem, but are most vulnerable to the consequences. Or the cost-of-living crisis and high interest rates, which take a disproportionate toll, pushing more countries toward debt distress and threatening development prospects. Add to this increasing economic fragmentation that could deprive them from the benefits of an integrated global economy that delivered high growth and raised living standards for billions of people.

Taken together, these challenges mean countries will need more support in the months and years ahead—to ensure economic stability and get back on the path to income convergence with advanced economies. Strong multilateral institutions have a vital role to play in providing this support, especially IDA, the World Bank’s fund for low-income countries, and the IMF.

IMF Reforms and Resources

Many countries have navigated difficult transitions before, and at each turn the IMF has been part of the global response, adapting to help our members and their people confront new challenges. Now—faced by a fresh set of transitions—we will continue to adapt and respond with agility: through both timely policy changes and stronger resources.

The overriding priority is a prompt and successful completion of the 16th quota review: increasing the overall size of the IMF’s quota resources—which are critical for a robust global finance safety net— with mindfulness of how the global economy has evolved.

This must be complemented by decisions to replenish the Fund’s concessional resources for vulnerable countries: a fully funded PRGT and a replenished Catastrophe Containment and Relief Trust that provides debt service relief when countries are hit by large shocks.

In parallel, we are exploring reforms to our lending toolkit, including adjustments to precautionary instruments to better suit the needs of our membership. We are also looking at ways to better account for how climate change affects debt sustainability and to enhance our support for countries hit by climate related shocks.

Together, these steps will ensure the IMF remains an inclusive institution capable of serving the needs of its entire membership, especially vulnerable emerging and developing economies.

G20’s Key Role

In a more shock-prone world and at a time of fundamental transitions—from climate change and debt distress to trade tensions and economic fragmentation—the world has high expectations of international policymakers, and rightly so.

We must act now and act together to get all countries back on a sustainable path to growth and prosperity.

This calls for strong leadership from the G20 to ensure the international financial architecture is fit for purpose with a well-resourced and representative IMF at its center. The global response must be commensurate in size to the world’s challenges.

This article originally appeared on IMF Blog.

 

Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate