The International Monetary Fund (IMF) has delivered a clear message to global policymakers and financial institutions: the world economy is no longer broadly stable. Krisalina Georgieva, the Managing Director of the IMF, has indicated that the global economy has entered an era where “uncertainty is the new normal.” The IMF sees the global economy’s resilience, which will allow moderate growth of roughly 3% in 2025, as a precarious “balance of policy”
The emergence of enduring volatility: What is at risk?
The precariousness comes from the convergence of structural and cyclical risk elements:
- Trade and tariff ambiguity
- Geopolitical tensions and fragmentation
Analysts say the recent spike in gold prices, now over $4,000 per ounce, likely indicates investors are becoming more risk-averse and are protecting against political downside situations with more safe-haven assets.
Several nations have had to balance weak fiscal positions after years of stimulus with spending on mandated welfare, education, and health systems.
At the same time, weak spending, demographic challenges, and debt burdens are likely to constrain policymakers’ capacity to use counter-cyclical fiscal tools.
To borrow from Georgieva, in the context of little policy space, the issue will no longer be whether shocks will occur, but rather when, and how large the impact will be.
U.S. Central Bank signals: Cuts ahead, but with caution
New signals regarding the U.S. Federal Reserve are adding to the global unease. In the minutes of the Fed’s september meetings, for the first time, a majority of the Federal Open Market Committee members indicated the possibility of further interest rate cuts for the first time in 2025. This is a somewhat more optimistic tone.
Yet, the support is conditional on reports still detailing Fed officials leery of the implications of interest rate cuts.
Some members of the board still voiced caution on the acceleration of cuts, with the majority withdrawing to cuts later in the year.
A strained global monetary climate
U.S. signals are more important than the Fed’s. In a global monetary climate already strained, the U.S.’s mixed signals can further ignite volatility in the already nervous global monetary climate.
Except for the frequency of recession, global growth over the last 40 years has become more predictable. The risk of future economic shocks, based on history, is likely to materialize. The policy margin, as the U.S. Fed, the International Monetary Fund, and the world’s central banks have warned, is dramatically thinner. Governments and central banks are less able to counter future economic shocks safely. The risks have grown tremendously.
The possibility of “black swan events” in the economy is on the rise
The possibility of these events, which include financial stress, debt crises, and major geopolitical escalation, is on the rise.
In today’s hyper-connected global economy, localized stress can cascade more rapidly, as we see in supply chains or through financial contagion. As investor and policy maker mindsets shift, and they come to expect volatility, behavior and strategies adjust to align with that expectation.
We are likely to be in a sub-regime where stability is the exception, not the rule. When markets adapt, the new environment will call for more discernible policy expectations, better institutions, and far more comprehensive risk management.
With instability a likely permanent feature of the global landscape, global policymaking must also shift.
Some of the advocated actions include:
- Rebuilding central bank credibility
- Building fiscal resilience
- Strengthening global cooperation
- building shock absorbers
Investing in fundamental growth must include productivity, education, and green transition structural reforms to remedy structural drags. In short, world leaders may need to think differently, not about going back to “normal” but about managing in a world where volatility is baked in. The IMF’s call to “buckle up” is not a rhetorical statement; it may be the best advice we have in this time of ongoing instability.