Economies resilient ‘for now’, says IMF
Fahad Badar reviews the IMF’s assessment of global resilience, weighing trade uncertainty, emerging markets, AI valuations and private-credit risks.
Recessionary conditions, in the US and elsewhere, have been avoided this year, and the global economy has performed ‘better than expected, but worse than we need,’ according to Kristalina Georgieva, Managing Director of the International Monetary Fund, at the opening of the annual IMF conference in Washington this month.
With justifiable defensiveness, the IMF pointed out in its pre-conference briefing that its economists had not, unlike some others, anticipated a recession resulting from President Donald Trump’s tariff regime. GDP growth is projected to be around 3% globally for 2025.
Some subjects were notable for their absence in her speech. She did not refer to the Government shutdown in the US, and geopolitical matters were at most touched upon. In part, this reflects a focus on broader economic developments, but tiptoeing around contentious issues possibly also reflects some deft manoeuvring by the IMF to minimize controversy.
The IMF has identified four factors that explain continued growth and resilience of the global economy, she said:
- Improved policy fundamentals.
- Private sector adaptability,
- Tariffs are less than feared – for now,
- Supportive financial conditions, which are holding for now.
Better governance, and deeper local bond markets, in many emerging economies, have been factors in this improved resilience, she said, citing a chapter on Emerging Market Resilience in the IMF World Economic Outlook. Private businesses have proven themselves to be highly adaptable in continuing to trade during periods of global tension and increasing trade barriers.
The trade-weighted tariff rate set by the US is 17.5%, higher than the level for preceding decades, but down from the 23% level expected in April. The effective tariff rate is below 10%, Mr Georgieva said.
Some tariff rates have been lowered and certain key sectors exempted. Ms Georgieva’s speech was shortly before President Trump announced a potential tariff of 100% on Chinese imports in protest at China’s policy on rare earth metals, although he toned down his comments shortly afterwards.
The fall in the value of the US dollar alleviates the debt burden for non-US borrowers, also helping the world economy to adapt.
It is possible, however, that more formidable barriers to economic growth and development will emerge in 2026 she warned.
The IMF reported that the World Uncertainty Index has soared to over 500, compared with a baseline of 100 in 2014. The gold price has risen above the extraordinary height of $4,000 per ounce, almost doubling since early 2024. It is not simply a dollar hedge, more a loss of faith in paper money more generally. Gold now represents more than one fifth of world reserves.
The IMF also reported that the proportion of 30-year-olds earning more than their parents has fallen in the US, from over 80% in the 1940s, to around 50%. On the other hand, the average citizen around the world is considerably better off compared with 30 years ago, Ms Georgieva noted, reflecting the rise of emerging economies. Populations are increasing in some regions, and falling in others. Prospects for Gulf nations and many emerging economies are more promising than for debt-laden industrialized nations. We could be approaching an inflection point in the economic balance of power.
In the financial markets, there are signs of a speculative bubble, especially in AI-related stocks. The timing and scale of any correction is impossible to anticipate, given the uncertainty around the impact of AI in terms of lifting productivity. A further complication is the projected increase in energy demand from the scaling up of data centers to power the AI revolution.
The bursting of an investment bubble only has a major impact on the wider economy if the banking sector takes a serious hit.
Separately, hidden risks in the private credit industry are indicated by the collapse of two firms in the US, the auto parts supplier First Brands, and subprime auto lender Tricolor Holdings. One of First Brands’ creditors Raistone, a technology company that helped arrange off balance sheet financing for the firm, has reported that $2.3 billion has ‘simply vanished’. Tricolor Holdings, a subprime auto lender, collapsed in September. The company used warehouse financing, borrowing from banks to make loans to consumers to buy cars, repaying the debt using money raised from selling asset-backed securities. The US Department of Justice has begun an investigation into Tricolor, to which several banks have exposure. The collapses may be one-off events, but it is not possible to be certain given the level of opacity in private credit. One area of investigation is the suspected use of the same collateral for multiple loans.
As regards the wider economy, the message from the IMF that it has been resilient is qualified by adding the phrase ‘so far’. Ms Georgieva questioned whether it has been fully tested yet, and advised her audience to ‘buckle up’.