“Countries defy gravity”: how much longer can the global economy resist chaos? | Global economy

In the vast, glass-walled Queen Sirikit Conference Center in Bangkok, the air-conditioned atmosphere was calm as policymakers from more than 100 countries gathered this week for the annual meeting of the International Monetary Fund – and contemplated the surprising strength of the global economy.

A small army of smiling, uniformed Thai staff were on hand to explain the bewildering geography of the heavily guarded building, where lunch options were as cosmopolitan as the delegates – including, improbably, a Burger King.

“Resilience” has been the buzzword at one event after another, after six months in which sky-high oil prices and geopolitical chaos have had less impact on the global economy than initially feared.

Growth has not fallen off the cliff, buoyed by the AI ​​investment boom; stock markets did not collapse. “We had Covid, the war in Ukraine, the supply chain shocks, the war in Iran and the alarm bells went off. And yet we didn’t have this massive, synchronized crisis. So I think there is this sense that a lot of countries are sort of defying gravity at all income levels,” said Clemence Landers, vice president of the Washington-based Center for Global Development.

But the IMF was also keen to remind delegates that the resilience of the past six months had come at a price and might not last. The message – “Resilience under pressure, urgent choices” – appeared on the front page of its flagship publication, the World Economic Outlook (WEO).

According to IMF experts, the cost of energy support measures put in place by governments to protect their citizens from soaring oil prices, a consequence of Donald Trump’s war in Iran, amounts to an extraordinary 0.5% of global GDP.

He said many countries would not be able to sustain support of such magnitude for long – and that some had already begun phasing out subsidies, exposing the public to more of the costs of the conflict.

The IMF urged governments to limit costs and let market signals do their work, sticking to temporary, targeted measures, rather than across-the-board subsidies.

In addition to dealing with the practicalities of a conflict that has lasted far longer than many governments had hoped – and whose outcome remains uncertain – the IMF was also keen to highlight two pressing risks.

The first concerns what he considers to be an unsustainable state of public finances, particularly in the world’s richest countries. The WEO forecast the highest budget deficits for advanced economies this year since the depths of the Covid pandemic.

This means that public debt in these countries is expected to continue to rise – from 108% of GDP last year to 115% of GDP in five years.

“Public debt is high in many economies, and fiscal reserves that might otherwise have helped respond to growing spending pressures from population aging, climate change and national security needs have instead been used to absorb repeated shocks,” the World Economic Outlook said.

Concern about profligate governments appears to have been one of the factors behind the recent sell-off in government bonds – pushing yields, or interest rates, to their highest levels in decades; but it also reflects higher expectations for inflation and growth.

IMF Managing Director Kristalina Georgieva lamented: “Too many countries have failed to take advantage of the post-pandemic recovery to rebuild fiscal reserves, and each new shock has pushed debt levels higher. »

Fearing that this would leave governments exposed to the next shock, while increasing the share of tax revenue needed to service the debt alone, Georgieva has repeatedly implored governments – notably Washington – to tighten their belts. “What is our strongest call to policymakers right now? Urgently repair the budget system before the cracks widen,” she said. It seems that this message has little chance of succeeding with voters shaken by one shock after another.

US Treasury Secretary Scott Bessent didn’t bother to travel to Bangkok to hear him; nor to supervise the meeting of G20 finance ministers, of which he officially chairs this year.

The British Chancellor, John Healey, chaired the meeting in his place. He spent much of his brief stay in Bangkok emphasizing the importance of standing with Ukraine — something the United States notably has not done of late. The Russian delegation was allowed to attend the G20 meeting, much to the annoyance of British delegates.

The UK received a positive review from Georgieva and her colleagues for developing a plan to balance the books; although she acknowledged that the bond markets had not rewarded her caution.

“The UK is actually a country where decisive action has been taken to reduce the deficit,” she said. Asked why UK bond yields had not fallen accordingly, Georgieva said London’s status as a global financial center tended to subject the UK to increased scrutiny.

“Traditionally we’ve seen more attention, in relative terms, in the UK, to what the government is doing. (There’s) a bit more sensitivity, and I think the government recognizes that they need to stay the course.”

Unusually, no communiqué was issued after the G20 meeting: a striking sign of the difficulty of reaching a multilateral agreement in the current period of division.

The UK will take over the G20 presidency next year and has ambitious plans for AI regulation and international development; but Bessent’s no-show is a reminder of the difficult task they face in reviving multilateralism.

The other alarming message that the IMF was keen to convey was the threat of a crash in the AI ​​market. As Georgieva said in a blog post on Friday: “The risk is that expectations will quickly outpace productivity gains, setting the stage for short-term disappointment. »

Federal Reserve Chairman Kevin Warsh, while expressing optimism about the long-term gains from “superintelligence,” as he insisted on calling it, put it another way: “We really don’t know what the market structure for these new technologies will be. Who is going to make money? What are the consequences for those who bet that they will make money, but the market structure doesn’t allow it?”

And AI is not just a stock market phenomenon, but a huge driver of real-world exports, hardware and necessary infrastructure – even if the benefits are heavily concentrated in a small number of economies, including Taiwan and South Korea. The repercussions would then be considerable.

It’s a familiar fear; but in its biannual Global Financial Stability Review, the IMF detailed the growing levels of debt being used to finance the AI ​​boom; the complex financial links between the companies involved; and the increasingly indebted position of the investors – including hedge funds – who support them.

As early as the Wall Street crash almost a century ago, economist JK Galbraith pointed out that leverage – betting with borrowed money, in fact – tends to magnify ups and downs.

And as ministers met in the Thai capital, elsewhere in Asia, there were tremors that could suggest Georgieva’s fear of “short-term disappointment” may already be gripping some investors.

South Korea’s Kospi stock index posted its biggest weekly loss since October 2008 at the height of the financial crisis, falling 14.5% during the week as traders dumped chipmakers. like Samsung and SK Hynix.

Analysts have reported that questions around AI companies’ borrowing, spending commitments and future profitability have roiled markets. Bonds issued by data center CoreWeave collapsed almost to distress levels as those concerns swirled.

Expectations for future U.S. interest rate hikes also rose, after data showed consumer price inflation rose in September, as did U.S. factory gate inflation. US technology stocks were also hit, sending the Nasdaq index down 2% between Monday and Thursday.

It was just the latest in a series of market turmoil in recent times, and finance ministers and central bankers probably paid little attention as they were whisked back in air-conditioned comfort to their capitals this weekend.

But if boom turns to bust, sending shockwaves through the global economy, they won’t be able to say they weren’t warned that the “resilience” we enjoy rests on shaky foundations.