The world economy has held up but ‘worrying signs’ remain, says IMF chief. How nations can navigate risk.

While the average person today is better off than she was 30 years ago, this view hides the “deep undercurrents of marginalization, discontent, and hardship" that are driving protests around the world and resulting in a policy revolution that is upending trade, immigration, and many international frameworks, said Georgieva in a curtain raiser speech at the Milken Institute ahead of a gathering of finance ministers and central bankers next week in Washington, D.C. for the annual meetings of the IMF and World Bank.

Policymakers next week will grapple with the economic impact of policy turbulence and what Georgieva described as “exceptionally high uncertainty" that is here to stay.

Despite these forces, the global economy has fared better than anticipated by those at the IMF meetings in April, when many feared a U.S. recession was imminent. Now, Georgieva says the IMF expects global growth to slow only slightly this year and next.

Georgieva credits such economic resilience to improved policy, especially in emerging markets that have “significantly" upgraded their policy frameworks and institutions by, for example, inflation-targeting, instituting currency flexibility, and more effectively using fiscal policy.

Another big factor has been companies’ agility at navigating tariff hikes and supply-chain disruptions, aided by flush balance sheets and the adoption of artificial intelligence. Central banks have also created supportive financial conditions by cutting interest rates.

Moreover, the average U.S. tariff on imports is now 17.5%, down from 23% in April. Plus, many countries have not retaliated as was expected, minimizing the type of trade war that could have had bigger economic blowback, and a weaker dollar has blunted some of the pain for countries that hold U.S. dollar-denominated debt.

But Georgieva cautions against letting out a big sigh of relief for the global economy: “Global resilience hasn’t yet been fully tested. And there are worrying signs the test may come."

Those signs include a surging global demand for gold: Holdings of monetary gold now exceed a fifth of the world’s official reserves. Georgieva also said the full effect of tariffs has yet to unfold. Margin compression could give way to higher prices and inflation in the U.S., and a flood of goods redirected from the U.S. market elsewhere could spark another round of tariffs as countries try to protect their domestic markets.

Easy financial conditions are “masking, not arresting" softening in the U.S. economy, including job creation, she warned. And a sharp correction in the stock market, with valuations reaching dot-com era levels, could result in tighter financial conditions that hurt global growth and expose economic and financial vulnerabilities as global public debt is expected to surpass 100% of gross domestic product by 2029.

Georgieva stressed the need for countries to shore up their finances and push for sustainable growth so that they will be better able to deal with further shocks. To that end, Georgieva argues that governments should aid private-sector productivity by cutting red tape and maintain fair competition by ensuring that regulations neither allow nor create unfair advantages. The IMF forecasts global growth to be roughly 3% over the medium term, down from 3.7% pre-pandemic.

Georgieva recommends that Europe name a “single market czar" with the authority to drive reforms, remove frictions that exist among countries in the labor market, goods and services, trade, energy, and finance. “Build a single European financial system. Build an energy union. Complete your project. And catch up with the private-sector dynamism of the U.S.," she said.

As for the U.S., she sees a fundamental need to address the federal government deficit, as the federal debt-to-GDP ratio is on track to surpass the record hit after World War II. Among other tax-policy reforms, she recommends incentivizing household saving by expanding favorable tax-advantaged retirement savings.

For Chinese policymakers, the IMF stressed the need to rebalance its economy away from exports and toward consumption. Georgieva recommends China adopt a fiscal program that spends more on the social safety net, cleans up the property sector, and redirects heavy investment away from the industrial policy that resulted in overcapacity and a surplus of exports. “There is a recognition in China that its export growth model is no more viable, but it’s not easy to switch to consumption," Georgieva said.

Among the messages she said she hopes to impart to leaders next week: Nations need to adopt policies that bring everyone along.

Write to Reshma Kapadia at reshma.kapadia@barrons.com