WASHINGTON (AP) – The outlook for the world economy this year has dimmed in the face of chronically high inflation, rising interest rates and uncertainties resulting from the collapse of two big American banks.
That’s the view of the International Monetary Fund (IMF), which on Tuesday downgraded its outlook for global economic growth. The IMF now envisions growth this year of 2.8 per cent, down from 3.4 per cent in 2022 and from the 2.9 per cent estimate for 2023 it made in its previous forecast in January.
The fund said the possibility of a “hard landing”, in which rising interest rates weaken growth so much as to cause a recession, has “risen sharply”, especially in the world’s wealthiest countries. Those conditions are also increasing the risks to global financial stability, the fund warned.
“The situation remains fragile,” IMF’s chief economist Pierre-Olivier Gourinchas told reporters on Tuesday. “Downside risks predominate.’’
The IMF, a 190-country lending organisation, is forecasting seven per cent global inflation this year, down from 8.7 per cent in 2022 but up from its January forecast of 6.6 per cent for 2023.
“Inflation is much stickier than anticipated even a few months ago,’’ Gourinchas wrote in the IMF’s latest World Economic Outlook.
Persistently high inflation is expected to force the Federal Reserve and other central banks to keep raising rates and to keep them at or near a peak longer to combat surging prices.
Those ever-higher borrowing costs are expected to weaken economic growth and potentially destabilise banks that had come to rely on historically low rates.
Already, Gourinchas warned, higher rates are “starting to have serious side effects for the financial sector”.
The fund’s annual Global Financial Stability Report, also released on Tuesday, issued recommendations for international decisionmakers:
“Policymakers may need to adjust the stance of monetary policy to support financial stability” – that is, possibly rethink the pace of interest rate hikes that are intended to cool inflation.
The fund foresees a 25 per cent likelihood that global growth will fall below two per cent for 2023. That has happened only five times since 1970, most recently when COVID-19 derailed global commerce in 2020.
The IMF also envisions a 15 per cent possibility of a “severe downside scenario”, often associated with a global recession, in which worldwide economic output per person would shrink.
The global economy, the fund warned in Tuesday’s report, is “entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner”.
The IMF issued modest upgrades to the economies of the United States and Europe, which have proved more resilient than expected even with much higher interest rates and the shock of Russia’s invasion of Ukraine.
The fund now expects the United States, the world’s biggest economy, to grow 1.6 per cent this year, down from 2.1 per cent in 2022 but up from the 1.4 per cent expansion that the IMF had predicted in January.
A robust US job market has supported steady consumer spending despite higher borrowing rates for homes, cars and other major purchases.
US Treasury Secretary Janet Yellen shared a more optimistic view on Tuesday on the state of the US economy and the banking system, which she says “remains sound”.
“I wouldn’t overdo the negativism about the global economy,” she said.
“I think countries have proven resilient, and a number of emerging-market and lower-income countries continue to show resilient growth.”
She pointed back to her statements during Group of 20 meetings in February in India.
“I said that the global economy was in a better place than many predicted last fall,” Yellen said.
“That basic picture remains largely unchanged. Still, we remain vigilant to the downside risks.”
