Global uncertainty is here to stay, says the head of the IMF

By Kristalina Georgieva, managing director of the International Monetary Fund

The world economy has proven more resilient than many feared. The nightmare of an all-out trade war has so far been averted, as has a global recession, with businesses adapting to trade disruption and past reforms, especially in emerging markets, helping countries manage.

But the outlook remains tepid and is shrouded in uncertainty. And the fog is unlikely to clear. This is the new economic reality confronting policymakers, businesses and consumers: profoundly uncertain times.

Policy uncertainty at a record high

A gauge of uncertainty co-developed by IMF staff illustrates this. While market measures of volatility and business surveys suggest investors and firms are relatively sanguine about economic prospects, overall policy uncertainty is at a record high.

What is behind the lack of clarity? To begin with, the new global trade regime is far from settled. Negotiations between America and its trading partners continue, and other countries are forging new alliances. Meanwhile, the domestic imbalances that ultimately drive trade balances remain stubbornly persistent.

Uncertainty runs deeper than trade

Yet the causes of uncertainty run much deeper. Geopolitical alliances are fragmenting and military conflicts are dragging on. Social unrest has flared in many places around the world as people demand better opportunities and more accountability.

The combination of low growth and high public debt is raising questions about fiscal sustainability — and limiting governments’ ability to respond to those growing social concerns amid rising spending pressures related to everything from demographic trends to defence needs.

The global financial system is seeing major shifts beneath a seemingly calm surface, including through the emergence of new forms of finance such as stablecoins and growing players such as non-bank financial institutions. All this is taking place against a backdrop of ageing populations in many countries, mounting environmental harm and rapid technological advancement.

The contours of the emerging landscape

This is a daunting landscape — but one whose future contours are at least apparent. In advanced economies especially, growth will be increasingly constrained by a combination of demography and tighter immigration policies, putting government finances under even more pressure.

Artificial intelligence will be deeply embedded in the economy, causing workforce disruption but potentially boosting productivity. With share prices of large tech firms reflecting that promise, whether and how fast AI delivers anticipated productivity gains could have implications for financial stability.

Given less common ground for global agreements, more energy will be directed towards bilateral and regional trade deals. If the recent social unrest around the world is any indication, trust in institutions and their leaders has eroded and rebuilding it requires determined efforts.

How these forces will interact is hard to predict. But it is already clear that the policy choices countries make today will define the ultimate shape of the emerging landscape.

Three policy choices that will shape the outcome

1. Get the fundamentals right

First, countries need to get the fundamentals right. That means bringing down debt and rebuilding fiscal space, so they can respond to the next shock. In most cases, budget consolidation should be gradual, with a focus on supporting growth and protecting priority spending. Central banks must carefully calibrate monetary policy to balance price-stability and growth risks. Safeguarding institutions is key to reinforcing macroeconomic and financial stability — and maintaining public support.

2. Reduce excessive external imbalances

Second, countries must reduce excessive external imbalances, starting at home, with domestic macroeconomic adjustments. Countries where saving is overabundant should take steps to stimulate domestic demand; in other places, rebalancing may call for fiscal consolidation.

3. Durably lift growth

Third, countries need to durably lift growth. Reforms that encourage entrepreneurship and innovation are essential to raising productivity and unlocking the potential of new technologies such as AI. Countries should work to maintain trade as an engine of growth.

A faster path is still possible

Though the path ahead is murky, we can see a scenario where the global economy accelerates. Driven by AI, productivity lifts off; conflicts end; a new trade equilibrium emerges; and financial stability holds. With smart policies that stabilise the global economy and create opportunities for people around the world, we can find a way forward despite the fog of uncertainty.

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