Share This Article
Dwindling liquidity for governments
During the Spring Meetings held in Washington by the International Monetary Fund (IMF) and the World Bank, a growing concern emerged: governments today have increasingly limited economic and fiscal margins to address new crises.
This was emphasized by IMF Managing Director Kristalina Georgieva, who highlighted that many countries are now in a significantly less favourable position than in the past to manage a potential large-scale recessionary shock.
Dwindling fiscal space
The central issue concerns the progressive narrowing of fiscal space, namely the ability of governments to intervene with expansionary economic policies without compromising the sustainability of public finances.
Geopolitical tension, particularly those related to the Iranian crisis, further exacerbate the situation. However, current difficulties do not stem exclusively from the Middle East.
For years, in fact, the world’s major economies have been facing a gradual depletion of available resources. Among the main causes are:
- an aging population
- an increase in military spending
- the real estate crisis in China
- structural growth in public spending
After a long series of closely spaced global crises, many governments now find themselves with limited tools and a reduced capacity to intervene.
Deficits and inflation restrain Central Banks
Many new fiscal measures are presented as temporary, but in practice it is becoming increasingly difficult to build credible strategies for reducing the public deficit in the medium term.
Further complicating the picture is persistent inflation, which is reducing the operational margin of central banks. With prices still high, it becomes more complex to implement expansionary monetary policies without creating new imbalances.
This means less flexibility on both the fiscal and monetary fronts.
Bond markets remain stable, but tension is mounting
In the short term, bond markets continue to show a reasonable degree of resilience. The savings accumulated by the baby boomer generation, now entering retirement, are also contributing to this stability.
At the same time, expectations of increased productivity linked to artificial intelligence are helping to maintain moderate economic growth.
Despite this apparent balance, nervousness is mounting. The growing volatility of financial markets is, in fact, an important signal that investors and institutions cannot ignore.
China, the United States and new global risks
Among the key factors contributing to this fragility is China’s heavy reliance on manufacturing exports, in a context where U.S. tariff policies are increasing and there is a return to more nationally focused industrial strategies.
These elements generate a system of interconnected risks involving:
- international trade
- geopolitical stability
- fiscal sustainability
- global economic growth
The most vulnerable countries are the most exposed to this scenario, with fewer protection tools and greater dependence on the international balance of power.
What tools remain for international institutions?
It is difficult to imagine a quick solution to these critical issues. The real question concerns the ability of international institutions to intervene in order to limit the consequences of possible new crises.
The role of the IMF, the World Bank and the major central banks will be increasingly decisive in preventing the reduction in global liquidity from turning into a new phase of systemic instability.
Understanding these signals today means being better prepared for the economic scenarios of tomorrow.
Clarissa Van Vuuren
Honorary President
