“The IMF Report and its Political Impact”, an article by Dr. Leonel Fernández

The first to warn that an economic hurricane was looming on the horizon was Jamie Dimon, the president of J.P. Morgan, the world’s leading investment bank.

Then came Goldman Sachs, another major investment bank. Later, Deutsche Bank, Citi Bank, Bank of America and Wells Fargo issued their respective statements on this issue.

Now the International Monetary Fund (IMF) has warned of the situation in its most recent report on the world economy, issued this October. In almost apocalyptic terms, the report states:

“As storm clouds loom, authorities must keep a firm hand on the helm.”

As we read these words, the first thing that must be considered is that the international credit institution is literally forecasting that a global economic storm is approaching.

The possible upcoming economic turmoil, according to the report, could be provoked by three powerful events currently weighing on the world economy. First, Russia’s invasion of Ukraine; second, an inflationary process that has provoked a high-cost of living crisis and third, a slowdown in the Chinese economy.

Over the course of this year and the next, more than a third of the world economy will experience a drop in growth, while the economies of the three most important economic powers of the planet (the United States, the European Union and China) will remain stagnant.

Should anyone have any illusions about what the immediate future holds, the IMF does not try to disguise reality with diplomatic language. On the contrary, it simply and directly explains the situation in the following terms:

“The worst is yet to come, and for many people 2023 will feel like a recession year.”

In addition to death and destruction, Russia’s invasion of Ukraine has provoked an acute energy crisis in Europe, as well as an increase in food prices, thus generating great hardship, disenchantment and overall worldwide concern.

The expansionary monetary and fiscal policies applied to reactivate economic growth, specifically after the drastic contraction suffered due to the COVID-19 pandemic, have had an inflationary effect.

The inflation process, or price increase, has been persistent contrary to initial forecasts that the situation would be temporary.

Inflationary Pressures

The expansionary monetary and fiscal policies applied to reactivate economic growth, after the drastic contraction suffered due to the Covid-19 pandemic, have had an inflationary effect.

This inflation or price increases have persisted, contrary to initial forecasts that it would be temporary.

In order to curb these inflationary impulses, the central banks, in a synchronized manner, have adopted restrictive monetary measures consisting of increasing interest rates and reducing liquidity within the financial system.

These measures, which have been rigorously applied, should tend to gradually reduce inflation levels, but at a very high cost: consumption reduction, lowering economic growth and increasing unemployment.

Moreover, as a result of the restrictive measures that have been implemented, the US dollar has strengthened. This means that all goods and services purchased from the United States will suffer price increases, while the debt owed by these countries will increase as interest rates rise.

The IMF alludes to this reality when it states that as the gusts of the storm approach, “the authorities must keep a firm hand on the helm.”

If this does not happen and if restrictive monetary policies are not rigorously applied, the central banks will have to assume the risk of not lowering the high cost of living.

But, on this point, the Fund warns of a possible double error that could occur when applying the aforementioned restrictive measures. First, by not applying these measures in a strict and consistent manner, inflation will persist. And, secondly, if its application is excessive a recession could occur that will paralyze the economy as a whole.

In summarizing these various scenarios, the United Nations dependent agency states: “The external environment is already extremely complicated for many emerging markets and developing economies…the shocks of 2022 will reopen economic wounds that were not completely healed after the pandemic.”

Political Impact

It is a simple and unnecessary exercise to establish the existing links, proven by history, between economics and politics.

Generally, when the economy grows, creating prosperity and well-being, the political atmosphere tends to be stable. These periods tend to arouse support for the governments in power, which in democratic regimes translates to support at the polls.

The reverse is also true. If the economy becomes stagnant, or prices begin to rise – a recession or any other economic calamity that lowers the living standards of the population – strong social tensions immediately arise. Governments begin to lose their popular support, and usually end their days by being rejected at the polls.

What is new in the contemporary world is that it is no longer just the natural interaction between economics and politics, but also the fact that the trends of the global economy are having an increasingly greater impact on national electoral results.

This situation began to become evident with the social and political consequences of the global financial crisis of 2007-2008. In Europe, for example, with the exception of Angela Merkel’s Germany, all the countries that, in the midst of the recession caused by the global financial crisis, applied austerity measures lost the elections.

The same thing happened in Latin America. During the so-called Golden Decade (2003-2013) – due to the high prices of commodities – the progressive leaders of the time enjoyed such broad popular support that they were even able to be democratically re-elected in their respective countries.

However, when the pendulum of the economy swung in the opposite direction, during the five years (2014-2019) in which the prices of export products plummeted, the governments were overwhelmed by protests, work stoppages and strikes. Some were even replaced in the polls by conservative regimes.

Now, the intensity of the hurricane winds will shake the foundations of the global economy generating, once again, social unrest and political turbulence in all corners of the planet.

We do not want this outcome, but it is the gloomy prognosis offered presented by the International Monetary Fund when in its most recent report on the world economy it states that “the worst is yet to come.”