On April 11, the IMF went on to curtail its 2023 global growth outlook slightly due to higher interest rates.
However, the IMF also issued a warning that a major escalation of financial system instability may cause output to decline to levels that are very close to a recession.
The IMF stated in its latest Global Economic Outlook report that financial sector contagion risks had been minimised by robust policy interventions following the bankruptcies of two US regional banks and the forced merger of Credit Suisse. But the chaos added to the persistently high inflation and the fallout from Russia’s war in Ukraine.
The recent spike in financial market volatility has thickened the cloud surrounding the global economic outlook, as per the IMF, as itself and the World Bank kick off spring meetings this week in Washington.
Uncertainty is high, and the balance of risks has shifted solidly to the downside as long as the financial sector continues to be volatile, according to the Fund.
The IMF now predicts global real GDP growth of 2.8% in 2023 and 3.0% in 2024, indicating a significant decline from 3.4% in 2022 due to tighter monetary policy.
Both the 2023 and 2024 forecasts were reduced by 0.1 percentage point from January estimates, owing to weaker performance in several major economies as well as forecasts of additional monetary tightening to combat persistent inflation.
The IMF’s prediction for the United States has increased somewhat, with growth in 2023 forecast at 1.6%, up from 1.4% in January, as labour markets remain strong. However, the Fund reduced projections for other major economies, including Germany, which is now expected to decrease 0.1% in 2023, and Japan, which is expected to grow 1.3% this year rather than 1.8% in January.
US Treasury Secretary Janet Yellen stated at a news conference that she is more positive about the prospects since a number of established as well as emerging market economies are demonstrating resilience.
They would not be overly pessimistic about the global economy, Yellen remarked. They believe the vision to be favourable.
The IMF raised its core inflation projection for 2023 from 4.5% to 5.1%, claiming that despite lower energy and food prices, inflation had not yet increased in many nations.
According to IMF Chief Economist Pierre-Olivier Gourinchas, monetary policy must continue to be centred on maintaining price stability so as to control inflation expectations.
Gourinchas told Reuters that central banks should not abandon their fight against inflation because financial stability threats appear to be contained.
While a big banking crisis was not included in the IMF’s baseline, Gourinchas predicted that a dramatic worsening of financial circumstances may occur again as worried investors try to test the next weaker link in the banking system, as they did in the case of Credit Suisse.
The study featured two evaluations that indicated that financial turbulence was having a moderate to severe impact on the global economy.
Pressure on vulnerable banks, such as failed Silicon Valley Bank and Signature Bank, overloaded by unrealized losses as a result of monetary policy tightening and dependent on uninsured deposits, creates a situation in which funding conditions for all banks tighten due to greater fear for bank solvency and potential exposures across the financial system, according to the IMF.
