The perspective for the world economy has worsened this year due to chronically elevated inflation, growing interest rates, and uncertainty progressing from the failure of two major US banks, the International Monetary Fund (IMF) said on Tuesday, cutting its forecast for world economic development.
The IMF now forecasts growth this year at 2.8 percent, falling from 3.4 percent in 2022 and from the 2.9 percent assessment for 2023 in its prior January forecast.
The IMF stated the chance of a “hard landing,” in which rising interest rates dilute growth so much as to trigger a recession, had “risen sharply,” especially in the world’s most prosperous countries. Those conditions also improve risks to global financial stability, the Fund warned.
The situation is still fragile, Pierre-Olivier Gourinchas, chief economist of the IMF, told reporters on Tuesday, adding that downside risks prevail.
The IMF, a credit organization with 190 member countries, forecasts global inflation of seven percent this year. It went down from 8.7 percent in 2022 but up from a January forecast of 6.6 percent for 2023.
Gurinchas wrote in the IMF’s latest World Economic Survey that inflation is much more persistent than expected even a few months ago.
Persistently high inflation should force the US Federal Reserve and other central banks to continue raising interest rates. This will keep them at or near their peak for longer to combat rising prices. Rising borrowing costs are predicted to dilute economic development and potentially destabilize banks that have depended on historically subordinate rates.
Gurinchas has cautioned that higher interest rates are beginning to have serious side effects on the financial sector.
The Fund’s yearly report on global financial stability, also published today, includes recommendations for international policymakers. Policymakers may need to adjust the monetary policy perspective to support financial stability. They may reconsider the pace of interest rate hikes as they aim to lower inflation.
The Fund anticipates a 25 percent chance that global growth will fall under two percent in 2023. That has occurred only five times since 1970. The last time coronavirus derailed global trade was in 2020.
The IMF also predicts a 15 percent chance of a harsh downside scenario linked to a global recession, in which world economic output would decrease.