If persistently high inflation continues to cause financial problems and keeps interest rates at an all-time high, the IMF warns of a “hard landing” for global economies.
The fund’s overall economic forecasts were largely unchanged since January in its latest World Economic Outlook. However, the report stressed that signs and symptoms of resilience along with lower global energy prices and food prices mask a darker reality.
Pierre-Olivier Gourinchas is the chief economist of the IMF. He stated: “Below The Surface. . . The situation is fragile as turbulence builds.
He stated that Inflation was much more persistent than expected even a few months back. Worse, the abrupt [monetary] policy tightening over the past 12 month is beginning to have serious side consequences for the financial industry.
The IMF published its two-yearly full forecasts on Tuesday. It stated that the turmoil in the UK’s government bond market and US banking turbulence last week showed the “significant vulnerabilities [that] both exist among banks and other financial institutions”.
The IMF stated that “Risks to our outlook are heavily skewed towards the downside, with the likelihood of a hard landing having increased sharply.”
Gourinchas stated that although the bank system is more resilient than it was during the 2008 financial crisis in 2008, policymakers still had to be “think about what could go wrong”.
He said that “we can all recall the long time between failure of an institution, no matter if it was Bear Stearns, Countrywide” and referring to institutions that had failed over a decade ago. “Every time this happened, it was treated as an isolated incident until it wasn’t.”
New forecasts by the IMF showed that there was a 25% chance that the global annual growth rate would fall below 2% in 2023. This is twice as high as normal. Since 1970, the global economy has grown so slowly in five years.
The IMF rated a 15% risk that a financial shock would cause significant global economic disruption.
According to the IMF’s unchanged central forecast the global economy will grow by 2.8 percent in 2023, rise to 3% in 2024, and remain at that level until 2028.
Kristalina Georgieva, IMF managing director, stated last week that this was the weakest medium term outlook for global economic growth since 1990.
Gourinchas stated that the IMF was projecting “supercharged growth” in China, with other countries returning to a more normal pace. Global productivity will decline, while economies will be affected by the coronavirus pandemic and fragmentation. This is all according to the IMF.The US economic forecast has been revised to reflect the January forecast. The fund now expects growth of 1.6% in 2023 and 1.6% in 2024. Three months ago, IMF projected a 1.4% increase in this year’s GDP and a 1% expansion in the next year.
As member states address last year’s rise in energy prices, the eurozone will likely grow slower at 0.8% this year before rebounding to 1.4% in 2024.
The IMF’s projection of China’s growth rate at 5.2 percent in 2023 is consistent with Beijing’s target. However, the fund expects it will slow to 4.5 percent in 2024.
The IMF urged central banks to continue working to reduce inflation and governments to remove some fiscal support that was provided in recent years to address Covid-19 and other energy crises.
The fund stated that central banks should do all they can to curb inflation as long as financial markets remain stable. Gourinchas warned price pressures could become more persistent, which would lead to a “harder landing scenario”.
He said, “There is concern that we might not have enough tightening of the system at this stage and more will be required.” This would increase the chances that output will fall further than our projections.
He said that a credit crunch could be a disinflationary force because of the US banking crisis last month.
“As long it’s orderly, some of the lending contraction may actually be advantageous in terms of bringing down Inflation and may replace further interest rate increases.”
Janet Yellen (US Treasury Secretary) was more positive about the outlook and sought to reduce fears of a “hard land”.
She stated that she hadn’t seen any evidence suggesting that credit was being reduced in the wake of the banking sector crisis. She also noted that the US economy was still performing exceptionally well, with solid job creation, falling inflation, and robust consumer spending.
Yellen told reporters that she wouldn’t exaggerate the negative aspects of the global economy. “I believe the outlook is reasonable bright.”