by David Lawder
WASHINGTON (Reuters) – The International Monetary Fund (IMF) on Tuesday downgraded its forecast for global economic growth for 2023 slightly, as higher interest rates slowed activity, and warned that a new round of turbulence in the financial system could drive the economy close to a recession.
In its latest report on the outlook for the world economy, the IMF observes that the risk of a domino effect on the banking system following the failure of two American regional banks and the forced takeover of Credit Suisse by its competitor UBS has been contained through strong political measures.
However, the turmoil that rocked the sector in March added an additional layer of uncertainty amid continued high inflation and war-related disruptions in Ukraine.
“With the recent increase in financial market volatility, the fog around the global economic outlook has thickened,” said the IMF, which is launching its spring meeting with the World Bank this week in Washington.
“Uncertainty is high and the balance of risk has shifted firmly to the downside as long as the financial sector remains unstable.”
The IMF now expects the global economy to grow by 2.8% in 2023 and 3.0% for 2024, a sharp slowdown from the 3.4% growth recorded in 2022.
In January, the IMF forecast global growth of 2.9% for this year.
This less optimistic scenario is partly due to weaker performance in some major economies as well as expectations of further monetary tightening to combat persistent inflation.
For the euro zone, the IMF forecasts growth of 0.8% this year, against 0.7% previously, and 1.4% in 2024.
For France, the IMF still forecasts growth of 0.7% in 2023, but that of 2024 should come out at 1.3%, against 1.6% expected previously.
Germany is expected to see its economy contract by 0.1% in 2023, while Japan could register growth of 1.3% instead of 1.8% expected in January.
The IMF has also confirmed its growth forecasts for China, at 5.2% in 2023 and 4.5% in 2024.
The outlook for the United States has improved slightly, with a growth forecast of 1.6% in 2023 against 1.4% previously, thanks in particular to the good health of the labor market.
The IMF further raised its forecast for core global inflation for 2023 to 5.1% from 4.5% forecast in January, arguing that price inflation has yet to peak in many countries. despite falling energy and food prices.
“Our advice is that monetary policy remains focused on reducing inflation,” said IMF chief economist Pierre-Olivier Gourinchas.
In an interview with Reuters, he said central banks should not stop their fight against inflation because of financial stability risks, which appear “very contained”.
BANKING TURBULENCE SCENARIOS
Although a major banking crisis is not in the IMF’s forecast, Pierre-Olivier Gourinchas believes that a significant deterioration in financial conditions “could lead to a deeper and higher slowdown”.
The IMF report includes two analyzes showing the moderate and severe impacts of the financial turmoil on global growth.
In a “plausible” scenario, strains on vulnerable banks – like Silicon Valley Bank and Signature Bank, burdened by losses in their bond portfolios due to monetary policy tightening and dependent on uninsured deposits – are creating a situation in which “funding conditions for all banks are tightening, due to greater concern for bank solvency and potential exposures across the financial system,” the IMF said.
This “moderate tightening” of financial conditions could reduce global growth by 0.3 percentage points for 2023, bringing it down to 2.5%, the fund estimates.
The Washington institution also included in its forecast a scenario with much wider impacts from bank-related risks, leading to sharp reductions in loans in the United States and other advanced economies, a significant decline in household spending and a flight of investment funds to safe havens denominated in dollars.
In this scenario, which could reduce 2023 growth to 1%, emerging economies would be hit hard by falling demand for exports, currency depreciation and a spike in prices.
According to the IMF, in this case, the negative impact could be about a quarter of that of the financial crisis of 2008-2009.
Other risks highlighted by the IMF include persistent inflation that requires larger rate hikes, an escalation of the war in Ukraine and setbacks in China’s economic recovery from the COVID-19 pandemic, including worsening difficulties in its real estate sector.
OIL PRICE RISK
The IMF forecast does not include the impact of the recent cut in oil production by OPEC+ countries which caused a spike in crude prices.
They are based on an average world oil price of $73 a barrel in 2023, well below the $84 Brent price on Tuesday.
For 2028, the IMF now expects global growth of 3%, its lowest five-year growth forecast since its Global Economic Prospects report was first published in 1990.
This reflects a natural slowdown in growth as some emerging economies mature, but also slower labor force growth and the fragmentation of the global economy along geopolitical lines, marked by tensions between the United States and China and by the war in Ukraine.
(Report David Lawder; Diana Mandiá, edited by Blandine Hénault)
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