IMF Reduces World Growth Outlook, as Financial Pressure Increases

The International Monetary Fund has reduced its projections for global growth, warning of high uncertainty as financial sector stress and the pressures resulting from tighter monetary policies and Russia’s invasion in Ukraine.

The fund released Tuesday a quarterly update to the World Economic Outlook. It said that gross domestic product would likely grow by 2.8% and 3% this year. Each 0.1 percentage point lower than what was forecast in January. This compares to 3.4% growth in 2022.

Last month’s unexpected failures of Silicon Valley Bank, Signature Bank, and Credit Suisse Group AG have roiled markets and sparked financial-stability fears. This has complicated central banks’ efforts to control inflation and maintain growth.

Pierre-Olivier Gourinchas is the chief economist of the fund. He stated that the risks were heavily weighted to the downside due to the financial turmoil over the past month and a quarter. While that is under control, we are worried about a worsening of financial conditions.

Gourinchas spoke at a briefing Tuesday and said that “there might be some lurking vulnerability and this is why financial supervisors, regulators, and authorities are very important at this stage to really go and examine these pockets of vulnerability still existing, either in the banking sector or non-bank financial institution financial institutions and more generally.”

He stated that banks would be “a bit more prudent” in lending loans moving forward. This could further slow down economic growth in the US as well as around the globe.

Although the 2023 forecast was not reduced by much, the report revealed that the IMF is less optimistic than January when it viewed this year as a turning point for the global economy. The risks are also more balanced.

The IMF warned last week that growth in the next five years would be limited. This is due to economic fragmentation risks caused by geopolitical tension – including the growing US-China rivalry, which has been reinforced by the war in Europe – as well as slower labor force growth and slowing long-term rates in China and South Korea.

The IMF has reduced its global growth estimate, but the World Bank increased its outlook from 1.7% in January to 2%, President David Malpass stated Monday. This was due to stronger Chinese expansion.

The global inflation rate is projected to be 7% in 2017, 0.4 percentage points higher than the January projection but still lower than 8.7% for 2022. This slowdown is due to falling commodity prices and the effect of interest rate increases. The pace of price growth in most countries will not exceed central bank targets until 2025.

Gourinchas stated that inflation has been more persistent and stickier than expected. “To some degree, this contraction in lending — If it were to occur — would knock off a bit of growth.”

The inflation rate is expected to be lower than 2022 in 76% of countries and slow to 4.9% by 2024.

Gourinchas stated that although the financial crisis appears to be under control, the IMF is worried about what might happen if things get worse.

It calls one scenario a “plausible alternate”, but financial instability is contained. However, it has a greater impact on conditions than the base case of the IMF and banks are less likely to lend. This would result in growth slowing to 2.5% by 2023, which is the lowest rate since 2001. It excludes the Covid-19 pandemic of 2020 and the global financial crises of 2009.

A severe downturn scenario has a 25% chance of happening. Credit disruptions could occur and global growth could slow to less that 2%. This is something that has only happened five times since 1970. A 15% chance of growth at 1% is also possible.

Other risks include inflation slowing down faster than anticipated, China’s reopening faltering and a worsening Russia-Ukraine conflict.

Gourinchas stated that “we’re seeing a lot more downside risk going forward.”