The United States has become the unexpected engine of the world economy. While Europe limps, the world's largest economy has defied expectations and omens of recession with surprising resilience. The International Monetary Fund (IMF) has revised upwards its forecasts for the United States while lowering those for Europe. This Thursday, its managing director, Kristalina Georgieva, pointed out that there are three factors that are making the difference: innovation, immigration and energy.
“The United States benefits from the abundant labor that crosses the border. This creates an internal political problem, and not everyone who crosses the border contributes something positive to the economy, but that supply of labor also gives the United States another comparative advantage: wages do not rise because there is no strong pressure for lack of labor on wage growth,” Georgieva said this Thursday in a press conference in which she presented the action agenda of the organization she directs.
Regarding the other two factors, the Bulgarian economist has indicated that in the United States it is easier to turn innovative ideas into successful companies, while in Europe there is still “work to be done to unleash innovation,” she stated. And in terms of energy, the United States has broken an export record while Europe has been penalized by the energy shortage derived from the war in Ukraine, since its main source of cheap supply before this conflict was Russia.
Georgieva stressed that the global economy has proven surprisingly resilient in the face of rising interest rates and the geopolitical instability unleashed by the wars in Ukraine and Gaza. “Despite these multiple shocks and restrictive financial conditions, growth remains firmly in positive territory. And we have slightly improved our forecast for this year to 3.2%. However, there is a lot to worry about,” she added.
The managing director of the IMF has indicated that “inflation has fallen, but it has not disappeared.” In the United States, she noted, “the other side of the coin” of unexpectedly strong economic growth is that “it is taking longer than expected” to control rising prices. Georgieva has admitted that the debate over when the US Federal Reserve will start lowering interest rates, given the strength of the US economy, is dominating the IMF's spring meetings. And she has confessed that she still expects there to be reductions in 2024, but she is aware that the strength of the dollar is worrying in some countries.
Furthermore, he added, the medium-term growth prospects, around 3%, are the lowest in decades. These are being held back by a general slowdown in productivity. And the divergences within and between each group of countries are growing, with the poorest countries falling further behind.
Three priorities
Georgieva has set three priorities as the IMF's message. First, rebuild fiscal buffers. “We have been arguing for a long time that, as central banks pursue the return of inflation to their target, they can use some help from the fiscal side. Now fiscal restraint is becoming even more important in its own right, because fiscal capacity is exhausted in most countries,” she said. “The time has come to adopt medium-term frameworks for fiscal consolidation,” she added. “In a world in which crises do not stop, countries must urgently strengthen their fiscal resilience to be prepared for the next crisis.”
The second priority is to revive growth through structural reforms. “Strengthening governance, reducing bureaucracy, increasing women's participation in the labor market and improving access to capital are essential for growth, not to mention structural reforms that increase productivity and investment in human capital, the ecological and digital transition, with artificial intelligence already upon us,” said the managing director of the Fund.
One of the reasons for slow global growth, according to Georgieva, is the disappointing improvement in productivity. She asserted that countries had not found the most efficient way to combine workers and technology and that years of low interest rates had allowed “companies that were not competitive to stay afloat.” The third priority of the head of the IMF, who has been elected for a second five-year term at the head of the organization, is to renew the Fund's commitment to its members, with financial support to countries that need it.