The International Monetary Fund logo is seen in front of the main building during the IMF-World Bank Spring Meetings in Washington, the United States, April 20, 2018. Photo by Yuri Gripas/Reuters
WASHINGTON (`) – The outlook for the global economy has clouded this year amid chronically high inflation, rising interest rates and uncertainty following the collapse of two major American banks.
That is the view of the International Monetary Fund, which on Tuesday revised downwards its outlook for global economic growth. The IMF now expects growth this year to be 2.8 percent, compared with 3.4 percent in 2022 and the 2.9 percent estimate for 2023 it gave in its previous forecast in January.
The fund said the possibility of a “hard landing,” in which rising interest rates weaken growth enough to create a recession, “has risen sharply,” particularly in the world’s richest countries.
CONTINUE READING: The global economy “is likely to get worse before it gets better,” the IMF warns
“Inflation is much more persistent than expected a few months ago,” wrote Pierre-Olivier Gourinchas, the IMF’s chief economist, in the fund’s latest World Economic Outlook.
The IMF, a credit organization with 190 countries, is forecasting global inflation at 7 percent this year, down from 8.7 percent in 2022 but up from its January forecast of 6.6 percent for 2023.
Persistently high inflation is likely to force the Federal Reserve and other central banks to raise interest rates further and keep them at or near peaks for longer to counteract rising prices. These ever-higher borrowing costs are expected to slow economic growth and potentially destabilize banks that have relied on historically low interest rates.
Gourinchas has already warned that higher interest rates are “starting to have serious side effects for the financial sector”.
The fund projects a 25 percent chance that global growth will fall below 2 percent in 2023. That has only happened five times since 1970, most recently when COVID-19 brought global trade to a halt in 2020.
The IMF also sees a 15 percent probability of a “serious downside scenario,” often associated with a global recession in which global economic output per person would contract.
The global economy, the fund warned in its Tuesday report, “is entering a dangerous phase where economic growth remains low by historical standards and financial risks have risen but inflation has not yet decisively turned the tide.”
The IMF issued modest upgrades for the US and European economies, which have proved more resilient than expected, even amid much higher interest rates and the shock of the Russian invasion of Ukraine.
CONTINUE READING: IMF raises expected growth for the global economy in 2023
The fund now expects the United States, the world’s largest economy, to grow 1.6 percent this year, down from 2.1 percent in 2022 but after 1.4 percent growth the IMF forecast in January had. A robust US job market has led to resilient consumer spending despite higher lending rates for homes, cars and other major purchases.
The IMF forecasts weak growth of 0.8 percent for the 20 countries that share the euro currency. But that also marks a slight improvement on the January forecast. Although Europe suffered from the disruption to Russian natural gas during the war, surprisingly warm weather reduced energy needs. And other countries, including the United States, have been more nimble than expected in shipping natural gas to Europe to replace Russia’s.
China, the world’s second largest economy, is expected to grow 5.2 percent this year, unchanged from the IMF’s January forecast. China is recovering from the end of a draconian zero-COVID policy that had kept people at home and hampered economic activity.
In the UK, where double-digit inflation is weighing on household budgets, the economy is expected to contract by 0.3 per cent this year. But even that is an improvement on the 0.6 percent contraction the IMF had forecast for the UK in January
In the developing world, the IMF has downgraded growth prospects for India, Latin America, the Middle East, sub-Saharan Africa and less developed Europe. Ukraine’s war-ravaged economy is expected to shrink by 3 percent.
The world economy has experienced one shock after another over the past three years. First, COVID-19 brought global trade to a near standstill in 2020. Next came an unexpectedly strong rebound, fueled by huge amounts of government aid, particularly in the United States. However, the surprisingly strong recovery sparked a resurgence in inflation, which worsened after the Russian invasion of Ukraine pushed up energy and grain prices.
The Fed and other central banks responded with aggressive rate hikes. Inflation has eased but remains well above central banks’ targets. Inflation is particularly persistent in service industries, where labor shortages put upward pressure on wages and prices.
Higher interest rates have created problems for the financial system, which has become accustomed to extraordinarily low interest rates.
On March 10, the Silicon Valley Bank failed after making a disastrous bet on falling interest rates and taking heavy losses in the bond market, sparking a bank run. Two days later, regulators shut down New York-based Signature Bank. The failures were the second and third largest in US history. In the wake of the troubles, US banks are likely to cut lending, which could hurt economic growth.
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