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World

IMF warns deeper financial turmoil would slam global growth

  • In World Economic Outlook report, it is now forecasting global real GDP growth at 2.8% for 2023 and 3.0% for 2024, marking a sharp slowdown from 3.4% growth in 2022 due to tighter monetary policy
Published April 11, 2023

WASHINGTON: The International Monetary Fund (IMF) on Tuesday trimmed its 2023 global growth outlook slightly as higher interest rates cool activity but warned that a severe flare-up of financial system turmoil could slash output to near recessionary levels.

The IMF said in its latest World Economic Outlook report that banking system contagion risks were contained by strong policy actions after the failures of two U.S. regional banks and the forced merger of Credit Suisse. But the turmoil added another layer of uncertainty on top of stubbornly high inflation and spillovers from Russia’s war in Ukraine.

“With the recent increase in financial market volatility, the fog around the world economic outlook has thickened,” the IMF said as it and the World Bank launch spring meetings this week in Washington.

“Uncertainty is high and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled,” the Fund added.

IMF trims India’s growth forecast to 5.9% for current fiscal year

The IMF is now forecasting global real GDP growth at 2.8% for 2023 and 3.0% for 2024, marking a sharp slowdown from 3.4% growth in 2022 due to tighter monetary policy.

Both the 2023 and 2024 forecasts were marked down by 0.1 percentage point from estimates issued in January, partly due to weaker performances in some larger economies as well as expectations of further monetary tightening to battle persistent inflation.

The IMF’s U.S. outlook improved slightly, with growth in 2023 forecast at 1.6% versus 1.4% forecast in January as labor markets remain strong. But the Fund cut forecasts for some major economies including Germany, now forecast to contract 0.1% in 2023 and Japan, now forecast to grow 1.3% this year instead of 1.8% forecast in January.

The IMF raised its 2023 core inflation forecast to 5.1%, from a 4.5% prediction in January, saying it had yet to peak in many countries despite lower energy and food prices.

IMF raises eurozone growth forecast, sees German recession

“Monetary policy needs to stay focused on price stability” to keep inflation expectations in check, IMF chief economist Pierre-Olivier Gourinchas told a news conference.

In a Reuters interview, Gourinchas said central banks should not halt their fight against inflation because of financial stability risks, which look “very much contained.”

Banking turmoil scenarios

While a major banking crisis was not in the IMF’s baseline, Gourinchas said a significant worsening of financial conditions could recur as nervous investors try to test the “next weakest link” in the financial system as they did with Credit Suisse.

The report included two analyses showing financial turmoil causing moderate and severe impacts on global growth.

In a “plausible” scenario, stress on vulnerable banks – some like failed Silicon Valley Bank and Signature Bank burdened by unrealized losses due to monetary policy tightening and reliant on uninsured deposits - creates a situation where “funding conditions for all banks tighten, due to greater concern for bank solvency and potential exposures across the financial system,” the IMF said.

Russia may see wider 2023 budget deficit, lower growth for years to come: IMF

This “moderate tightening” of financial conditions could slice 0.3 percentage point off of global growth for 2023, cutting it to 2.5%.

The Fund also included a severe downside scenario with much broader impacts from bank balance sheet risks, leading to sharp cuts in lending in the U.S. and other advanced economies, a major pullback in household spending and a “risk-off” flight of investment funds to safe-haven dollar-denominated assets.

Emerging market economies would be hit hard by lower demand for exports, currency depreciation and a flare-up of inflation.

This scenario, which Gourinchas put at a 15% probability, could slash 2023 growth by as much as 1.8 percentage points, reducing it to 1.0% - a level that implies near-zero GDP growth per capita. The negative impact could be about one-quarter of the recessionary impact of the 2008-2009 financial crisis.

Other downside risks highlighted by the IMF include persistently high inflation that requires more aggressive central bank rate hikes, escalation of Russia’s war in Ukraine, and setbacks in China’s recovery from COVID-19, including worsened difficulties in its real estate sector.

Oil price risk

The IMF forecasts do not include the impact of a recent oil output cut by OPEC+ countries that has caused oil prices to spike. It assumes an average 2023 global oil price of $73 per barrel - well below Monday’s $84 Brent crude futures price, but Gourinchas said it was unclear if this level could be sustained.

Oil rises over 1% with US and China inflation in focus

For every 10% rise in the price of oil, IMF models show a 0.1 percentage point reduction in growth and a 0.3 percentage point increase in inflation, Gourinchas added.

The IMF also now pegs global growth at 3% in 2028, its lowest five-year growth outlook since the WEO was first published in 1990, reflecting naturally slowing growth as some emerging economies mature, but also slower growth in workforce populations and fragmentation of the global economy along geopolitical lines, marked by U.S.-China tensions and Russia’s war in Ukraine.

Comments

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KU Apr 11, 2023 09:09pm
One thing is certain now, we are gutted. Most of the world leaders will be preparing for the hard days and ensuring how to save their citizens from economic hardship, while our leaders are busy merry-making their ill-gotten wealth and want more of the same. Tragic and despicable!
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Tulukan Mairandi Apr 11, 2023 09:53pm
Just as i thought it can't get any worse for Pakistan, with default and chaos on the horizon, this news comes out and extinguishes any sliver of hope that I had!
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Farhan Apr 11, 2023 11:05pm
Such a reports hammer on the pre lingering hopes of revival and progress. It's the real Blackhole for the incubants leaders of developing nations to survive.
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farhan ali Apr 11, 2023 11:07pm
Up up and up
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Aftab Aftab Apr 12, 2023 12:23am
Underdeveloped countries facing economic crisis ( Pakistan: Sri Lanka: Other African countries) due to tension US and China: Russian and Ukraine war : Poor countries people facing trouble: poverty: No budget allocation for Health: Education: Security: Employment: Climate change is also big problems in Pakistan: unstable due to weak democratic system: Status Quo System ( Big mafia 5% having control of all departments in poor countries: ): Solution : UNO and other Big Countries : America: China : Russia: Germany: Britain: France and other EU : African countries : Japan: Australia: Canada: responsibility to make arrangements resolve the dispute ( War) through dialogue and start work for peace in the world: Peaceful world necessary for Good economic world.
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