The global economy is resilient this year despite strong economic and geopolitical headwinds. But, given forces lurking beneath the surface, delegates at this year’s International Monetary Fund-World Bank meetings in Bangkok, Thailand, should be filled with angst.
The near-term outlook is upbeat. US growth appears stout on the back of demand for artificial intelligence, solid consumption and a healthy labour market. Even Europe surprises to the upside, buoyed perhaps by increased German defence spending. China faces persistent doldrums and Japanese growth is tepid, but India remains firm – as do other Asian markets, helped by the AI boom.
Many emerging markets, having strengthened fundamentals, can better weather future storms than advanced economies can. The IMF’s World Economic Outlook should well sustain its 3% global growth handle.
But there are many other factors that should give annual meetings delegates pause.
What lurks beneath the surface?
Advanced-economy fiscal positions are often characterised by excessive debt and deficits. Surging American and French yields are threatening to reawaken bond vigilantes, tank economies and unleash global financial market instability. US fiscal policy is incontinent, looking at a string of 6% of gross domestic product fiscal deficits. America spends more on interest than defence.
France grows little, has high debt and deficits, and – like America – its political class is stuck in a rut, unable to tackle fiscal woes. France’s fiscal position is contaminating Italian and other yields. ‘Lo’ and ‘le’ spreads are back. Can the European Central Bank sit on its hands? Are echoes of the 2012 euro crisis looming?
In Japan, the Takaichi administration’s plans are expansionary, while the UK faces limits to fiscal space. Rising yields are worsening interest bills for fiscally challenged economies.
Inflation is stubbornly sticky in advanced economies, exacerbated by persisting supply shocks – including energy insecurity, tariffs, the impact of El Niño and demand for rare earths. US forecasters often project inflation reverting to the 2% target, but America has been above target for five years. While the Federal Reserve navel-gazes over data squiggles and obsesses over whether a 25-basis point hike now or later is an economic alpha and omega, the US appears lodged in a 3% inflation regime.
Strong AI credit demands are exacerbating upward rate pressures. But are they sustainable or headed towards a bust?
Geopolitics is a wild card. The Iran war endures, jeopardising global energy supplies. Russia continues its atrocities against Ukraine. Uncertainties are mounting in Europe over rising anti-democratic forces. The US and China at best appear to be maintaining their uneasy stalemate, while retrenching from each other. President Donald Trump remains unpredictable, alienating allies, damaging America’s reputation and undermining global confidence, which invariably infects markets.
Rising concerns over financial instability
These forces are turning central banks hawkish, pushing up short-term rates and the long end of the market. The US 10-year Treasury yield has risen to roughly 5.25% from 4%, reinforcing factors already pulling foreign yields up. The France-Germany spread jumped to 140 basis points from around 60. Surging US yields and French woes have propelled the dollar higher, breaking modestly out of the 1.14 to 1.18 range to the euro of the last year.
The Fed under Chair Jerome Powell cut rates three times in 2025 and was lambasted by Trump. The new Fed under Kevin Warsh raised rates in September and the president was muted. More hikes appear to be in store, though market predictions are aggressive. Warsh’s desire to let markets find their levels – while Trump and Treasury Secretary Scott ‘I am the house’ Bessent seek unsuccessfully to cap higher rates – may result in a short honeymoon for the new chair and mounting administration pressures for financial repression. The ECB has implemented two 25 basis point hikes this year and markets expect more, while behind-the-curve Bank of Japan appears inclined to accelerate rate increases.
The meetings will offer more hot air on large, persisting global imbalances – a US-China story going nowhere. The US current account deficit remains elevated due to the economy’s firmness and massive US fiscal deficit, despite ‘tariffs’ being Trump’s favourite word. When the US and G7 mention global imbalances, they focus on China’s surpluses, not their miscues.
China’s huge surpluses remain locked in. President Xi Jinping is unwilling to overhaul China’s broken investment-led growth model, incentivising excess production amid weak domestic demand and disincentivising consumption and services. An undervalued renminbi is a model feature – no matter what the People’s Bank of China says. It appears intent on keeping the currency weak to support net exports and growth. With America shutting Chinese autos out, a less competitive Europe is belatedly seized with China shock 2.0.
With rising US yields and a more hawkish Fed than BoJ, the yen may continue to slide towards Japan’s line-in-the-sand ¥160 level despite mistaken protests from the Ministry of Finance about disorderly markets, rate checks and intervention. But could higher Japanese yields cause a carry trade crushing snapback in flows to Tokyo and disrupt markets?
The angst over rising financial market instability may push headlines about stablecoins and central bank digital currencies somewhat to the side.
Operational issues
The IMF will tout its latest operational work – the comprehensive surveillance and conditionality reviews and the low-income country debt sustainability framework. These reviews are evolutionary: examining internal procedures and refining past practices. But their real-world meaning is uncertain.
Will the Fund further raise its voice on China’s growth model and renminbi, or the US’s reckless fiscal outlook? Will China and non-traditional creditors be more willing to provide significant debt relief? Will the international community continue its ‘extend and pretend’ risk of treating debt distress as cases of illiquidity rather than insolvency? Will the Common Framework provide quick deep relief for Senegal? Can we expect the Fund to crack down on its wards – Pakistan, Egypt, Jordan, Sri Lanka – rather than refinance itself?
Given large IMF exposures, Argentina and Ukraine will be focal points. Argentina merits praise for maintaining its current disciplined macroeconomic policy course and structural reforms. But the 2027 elections could trigger financial volatility. If Javier Milei wins again, Argentina will hopefully have more years to entrench a needed culture of macroeconomic discipline and overturn its ruinous economic legacy.
The Ukraine programme faces difficulties this year amid a truculent parliament, but there is little choice but to move forward – even if unevenly. Added financing needs due to Russia’s brutal attacks pose challenges for the Fund and donors, but the latter must come through and shamefully without US support. The IMF is hesitantly undertaking information-gathering activities in Venezuela, constrained by the US.
Implementation of the Fund’s pending quota increase remains long overdue due to US congressional failure to ratify needed legislation. Europe continues to block the managing director’s outstanding proposal to direct future excess income to subsidise lending to low-income countries.
There is much to discuss in Bangkok. Delegates will arrive, and most likely will leave, with angst.
Mark Sobel is Chief Economist and Vice Chair of OMFIF.
Interested in this topic? Subscribe to OMFIF’s newsletter for more.