Growth policies and higher credit provision needed to exit slowing economy, Malpass says

Countries need to adopt policies that "generate more growth" to emerge from a "a global economy that's slowing", while also ensuring that more credit is made available to businesses amid a banking crisis, the chief of the World Bank has said.

Worldwide economic growth is slowing in the backdrop of persistent inflation, high oil prices and credit disruption, David Malpass, president of the multilateral lender, told a media briefing on Thursday on the sidelines of the IMF-World Bank Spring Meetings.

"The world is in this long period of normalising interest rates after a long period of artificially low interest rates," he said. "So it's going to take time for asset prices to adjust and also for capital flows to move to more productive uses. The best way out of this for the world would be to have policies that generate more growth, more production, better living standards for people."

The World Bank has revised its 2023 global growth forecast slightly upwards to 2 per cent from a January forecast of 1.7 per cent based on the improved outlook for China’s economy as it winds down Covid-19 pandemic-related restrictions.

China, the world’s second-largest economy, is projected to grow 5.1 per cent this year compared with 4.3 per cent in the bank’s January Global Economic Prospects report. Advanced economies, including the US, are also doing a bit better than the Washington-based lender anticipated in January.

Meanwhile, the International Monetary Fund projects global growth to slow down to 2.8 per cent this year and remain at about 3 per cent over the next five years, marking its weakest medium-term forecast in decades.

"The world economy has proven remarkably resilient to the multiple shocks of the last three years but it is yet to overcome the combination of weak growth and sticky inflation," IMF managing director Kristalina Georgieva said on Thursday. "Underlying inflation remains stubbornly high, geo-economic fragmentation affects trade and capital flows, and downsides risks have increased."

Fighting inflation and safeguarding financial stability have become more complex with the recent banking sector pressures, she said.

The collapse of US lender Silicon Valley Bank last month stoked fears of a global banking crisis similar to when Washington Mutual collapsed in 2008. In the days after SVB's collapse, mid-size lenders Signature and Silvergate Bank both failed and shares tumbled at other regional banks.

Contagion fears also spread to Europe, where Switzerland's Credit Suisse was acquired by rival UBS in a deal engineered by Swiss government authorities.

The major shift from a period of low interest rates to higher ones has led to a "maturity mismatch" for some entities, Mr Malpass said. "If we look worldwide, there will be some other cases of maturity mismatch [similar to SVB]. But the more pressing challenge ... is the effect on credit. "In both the advanced economies and in developing countries, we're seeing the availability of credit go down, as banking systems examined their balance sheets, and so I think it will be very important for the world to think in terms of how do you have short-term financing going into companies."

Short-term financing is the "lifeblood of growth" for a company, he stressed. "And so as the banking systems come under strain, there needs to be redoubled efforts to have capital flow to working capital ... that's actually an urgent problem."

The impact on developing countries is greater and is a severe shock in terms of their financing, Mr Malpass said. "I really think it needs [to be urgently] addressed by the advanced economies of what's going to be done in order to allow working capital financing to start flowing again," he said.

Central banks should also address financial stability risks where they emerge and work closely with regulators and supervisors, Ms Georgieva said. "The key is to monitor risks that may be hiding in the shadows in banks and non-bank financial institutions, or in sectors such as commercial real estate," she said. "Vigilance is imperative."

Advanced economies should also do more to help vulnerable middle-income countries reduce their debt burden. Despite a sharp rise in borrowing costs, the emerging market debt pile hit a new high of $98 trillion last year, the Institute of International Finance said.

While the nominal value of global debt declined by $4 trillion to below $299 trillion last year, the retrenchment was driven “entirely by mature markets” whose total debt dropped at the end of 2022 to about $200 trillion, down from more than $206 trillion recorded at the close of the previous year, it said. "We know that low-income countries are particularly vulnerable given high debts," Ms Georgieva said. "As their per capita income growth [lags], it is becoming harder and harder for them to catch up."