Spring World Bank and IMF Meetings: Heated Debates, Limited Consensus

Compared with the IMF fall meetings back in October, the overall mood from investors and policymakers alike was somewhat brighter in April: Fears of an imminent European recession were low, and there was outright enthusiasm for the Chinese growth outlook. Nevertheless, restrictive monetary policy across the developed markets along with the recent banking sector stress presented new fodder for debate. Overall, there seemed to be disagreement about the timing and magnitude of the various crosscurrents. 

Here are our main takeaways from a busy week of World Bank and IMF meetings:

Monetary policy drags: how much, and when? The IMF published still-dismal forecasts, anticipating 3% global growth for 2023, the slowest pace since 1990. Not surprisingly, many attendees’ debates centered around the U.S. outlook, with disagreement high around the eventual economic impact of the 5-percentage-point rise in the fed funds rate. Many viewed the regional bank failures as symptomatic of tighter monetary policy and higher rates; however, there was disagreement around whether the failures were isolated cases or harbingers of more banking sector stress to come. We saw even more disagreement on the potential economic implications, with one prominent speaker arguing we would see little if any effect, while others acknowledged the risk of a sudden stop in credit and economic activity if the banking sector outlook worsened. The outlook for inflation was similarly uncertain, with disagreement around where inflation would settle, and what the central bank would do about it. 

Stricter banking supervision is expected. Nevertheless, many attendees agreed that one clear implication of the bank failures was increasing supervisory scrutiny. Although little was expected in the way of regional legal changes, representatives from the BCBS/IOSCO (Basel Committee on Banking Supervision and the International Organization of Securities Commissions) appeared very focused on regulatory enhancements achievable outside of statutes. The discussion highlighted the international pressures (alongside domestic pressures) on the U.S. Federal Reserve to increase regulatory enforcement stringency, which in our view will likely contribute to tighter credit conditions and slower growth. 

Secular meet cyclical: lots of buzzes around the IRA. There were several IMF sessions on navigating the brown-to-green energy transition, the importance of infrastructure investment, and the changing landscape for global trade, all important questions in both the near and long term. For the cyclical horizon, the focus mainly was on the economic implications of the U.S. Inflation Reduction Act (IRA). While the U.S. Congressional Budget Office has published preliminary estimates, many participants said heightened corporate enthusiasm (and interest from foreign governments) argued for a stronger and sooner investment impulse, which could ultimately be important near-term support as the U.S. economy faces other headwinds, including higher interest rates.

Policy misstep fears. Many attendees expressed worry over the potential for policy mistakes, with specific concerns around the upcoming U.S. debt ceiling. One prominent Republican economist assigned 35% odds on a scenario of technical default. While others argued that it was in no party’s political interest to default, concern was generally elevated, especially among non-U.S.-focused portfolio managers. We heard several emerging market (EM) investors remark that uncertainty about the debt ceiling and regional bank fallout made the meetings feel more like a U.S. conference, with idiosyncrasies across EM economies taking somewhat of a back seat. 

Last year’s pain points already forgotten? We were struck by how quickly many of the themes that drove markets and economies over the past year seem to have faded as topics of concern to participants. There was noticeably little discussion around U.S. inflation, European growth concerns, and Chinese economic risk. Amid a somewhat better U.S. inflation print for March, only a handful of participants seemed focused on further upside risks to U.S. inflation. Similarly, only a few people spoke about further downside risks to European growth as the European Central Bank continues it's tightening campaign. Many considered China’s relatively smooth reopening to be an important global growth engine, but few aired concerns about the potential inflationary impulse relative to last year.

Bottom line: What seems clear to us from the spring World Bank and IMF meetings was that investors and policymakers alike are struggling to understand the economic and policy implications of various crosscurrents: a robust start to 2023, clouded by restrictive monetary policy, bank failures, and still elevated inflation. With disagreement high, and conviction generally low, these meetings may not be the catalyst for directional market reversals and peaks, as they sometimes have been in the past.