The IMF warned that the fog surrounding the global economic outlook has thickened amid turmoil in the US banking sector and the collapse of a major European bank, dampening the early 2023 optimism. this warning emerges in a period marked by stubbornly high inflation and renewed instability in financial markets.
In its latest Global Economic Outlook released during the spring meetings in Washington, the IMF translates this uneasy environment into a modest downward revision of world growth. the forecast for this year and next sits at 2.8% and 3.0% respectively, below the January projections by nearly a tenth of a point. the IMF cautions that a sharper slowdown could materialize if banking stress intensifies and spreads through advanced economies, a scenario that would pull down growth further. IMF chief economist Pierre-Olivier Gourinchas notes that conditions are manageable for now, yet warns that significant deterioration could trigger a deeper slowdown.
The fog surrounding the global outlook has intensified
the IMF’s Global Financial Stability Report, issued the same day, frames the central question for markets and policy makers. Are recent events a prelude to systemic stress testing the resilience of the world’s financial system, or are they isolated challenges tied to tighter monetary policy and tighter liquidity over the past decade? The report emphasizes a red flag moment that deserves close scrutiny and proactive risk management.
Beyond the financial sector, the IMF flags multiple risk channels that could widen the fog. The possibilities include a sharper downturn in growth due to ongoing financial strains, contagion among banks and non-bank financial institutions, sovereign debt pressures, the persistence of geopolitical tensions from the war in Ukraine, renewed increases in food and energy costs, and persistent inflation. Together, these factors threaten global economic momentum.
anemic forecasts
the baseline projection for world growth assumes financial tensions remain contained. under this assumption, global growth slips from 3.4% in 2022 to 2.8% in 2023, a pace that is notably weaker than January expectations, before a gradual recovery over the next two years. the IMF stresses that this would mark the weakest medium-term outlook in decades, underscoring a fragile global economy. in a more stressed scenario with elevated financial pressures, growth could slow further into 2025, with advanced economies hovering around 1% in 2023 and remaining subdued thereafter. such an outcome would reflect the need for careful policy calibration to tame inflation while preserving financial stability. the report stresses that the consequences of softer financial conditions, ongoing conflict in Ukraine, and rising geo-economic fragmentation weigh heavily on the outlook.
for advanced economies, the IMF pegs growth at about 1.3% in 2023. the United States is projected to expand around 1.6%, with Japan near 1.3%, Canada around 1.5%, and the euro area near 0.8%. the United Kingdom is forecast to contract slightly. among emerging economies, a global rise of roughly 3.9% is anticipated in 2023, with China leading at about 5.2% and India around 5.9% as the economy continues to rebound from disruptions tied to the pandemic era.
inflation and interest rates
under the leadership of Kristalina Georgieva, the IMF assumes inflation will gradually move back toward central targets by 2025 in most scenarios. when inflation is expected to settle, structural factors could allow interest rates to ease toward pre-pandemic levels, but not immediately. for now, the IMF urges central banks to maintain a firm stance against inflation while addressing financial stability concerns.
the IMF notes that monetary authorities may need to adjust hypotheses if financial pressures intensify. in such a scenario, steps to prevent a systemic event that could undermine market confidence become essential. the report suggests clear and decisive communication from central banks and a readiness to pause further rate hikes if circumstances allow while remaining committed to lowering inflation when conditions permit.
to date, policymakers have delivered a strong response that has helped ease market tensions, yet market confidence remains fragile. lingering strains persist across various institutions and markets as investors reassess the resilience of the financial system. while regulatory reforms since the global financial crisis have built greater resilience, concerns linger about hidden vulnerabilities not only within banks but also in non-bank financial intermediaries. the IMF emphasizes ongoing vigilance and proactive measures to safeguard stability across the entire financial landscape, a stance echoed in the Global Financial Stability Report attributed to IMF analysts.