To observers of global economy and finance, the air of apprehension at the recently concluded Spring meetings of the IMF and World Bank was not surprising at all. Two factors are currently playing out to unsettle world trade, public finances and capital markets: first, the spat between Israel and Iran and, second, the fiscal, and thereby inflationary impact of over 80 countries including India going to polls this calendar year.

The meetings as well the three reports released last week — the IMF’s Global Financial Stability Report, its Fiscal Monitor and the Bank’s World Economic Outlook — draw succour from the ‘resilience’ of growth amidst generally declining inflation since 2022. But there is no mistaking the elephant in the room — sticky inflation, and its fallout on financial stability and growth. The Fund-Bank reports clearly say that since the “progress towards inflation targets has somewhat stalled since the beginning of this year”, the Fed is expected to hold rates ‘higher for longer’. US consumer inflation in March at 3.5 per cent was above the target of 2 per cent. The reports recommend that “central banks should avoid premature monetary easing” — clearly an effort to check volatility in capital flows in emerging economies. While inflation was the main theme at the meetings, public debt and ‘fragmentation’ of global trade as medium term risks to inflation and growth too emerged as key takeaways.

Today’s global inflation stems from many sources: commodity shocks; disruption to trade arising out of protectionism and emergence of ‘geo-economic’ enclaves; rising cost of labour in the developed world (particularly the US) as a result of social safety nets; and a vicious cycle of public debt (led by US and China) and inflation feeding into each other. High public debt is believed to crowd out private investment, hurting growth and taxes, leading to more debt in the absence of spending cuts. A weak medium-term outlook on global growth is linked to this debt-inflation overhang. There are two notable issues here: first, US debt has become a global worry; and second, it has become difficult to roll back spending undertaken during crisis years.

The US’s fiscal deficit jumped to 8.8 per cent of GDP in 2023 from 4.1 per cent in 2022 (it was 11.1 per cent in 2021). China’s fiscal deficit was 7.1 per cent of GDP in 2023, against 7.5 per cent in 2022, while India’s (general government) was 8.6 per cent of GDP (9.2 per cent). The Fund-Bank duo is worried over whether US growth will be robust enough to offset rising debt. China’s tanking property sector could impact all asset classes, growth and trade. But the biggest challenge for multilateral bodies is to overcome fragmentation of trade. Trade blocs have been carved out along geo-political lines, with more trade taking place within blocs than between them. This could create untold inefficiencies, besides inflation.