The IMF lowers the outlook for world growth due to financial risks

The International Monetary FundI posted its global growth projections and anticipate about ithigh level of uncertainty and risksat a time when financial sector tensions add to pressures from tightening monetary policy and Russia’s invasion of Ukraine.

Gross domestic product will likely grow 2.8% this year and 3% next, 0.1 percentage point less than forecast in January, the Fund said Tuesday in a quarterly update to its World Economic Outlook. In 2022, the economy expanded by 3.4%.

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The Iunexpected bankruptcies last month of Silicon Valley Bank and Signature Bank and the collapse of Credit Suisse Group AG shook up the markets and raised alarm bells about financial stabilitycomplicating the efforts of central banks to control inflation while maintaining growth and the health of the banking system.

“Risks are tilted to the downside, largely due to the financial turmoil of the past month and a half,” he said. Pierre-Olivier GourinchasIMF Chief Economist. “That is under control for now, but we are concerned that this could lead to a sharper slowdown. and high if financial conditions deteriorated significantly.

In a briefing held on Tuesday, Gourinchas who stated “maybe there are some vulnerabilities lurking and That is why it is very important that at this time financial supervisors, regulators and authorities take a very careful look at these pockets of vulnerability that may continue to exist, both in the banking sector and in non-bank financial institutions, and more broadly” .

Although the magnitude of the reduction in the forecast for 2023 is not large, the report shows that IMF is more dovish on outlook than in Januarywhen he perceived that this year was a “turning point” for the world economy and the risks were more balanced.

Last week, the IMF predicted that growth in the next five years would be limited. This warning is based on the risks of economic fragmentation caused by geopolitical tensions, including the growing rivalry between the United States and China, bolstered by the war in Europe, as well as slower growth in the labor force and slowing rates of employment. Long-term expansion in China and South Korea.

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While the IMF lowered its estimate for global growth, the World Bank raised its outlook to 2% from 1.7% in January, due to further Chinese expansion, its chairman, David Malpass, said Monday. Bloomberg Economics also raised its economic expansion forecast for this year.

What Bloomberg Economics says…

The “baseline scenario is global growth of 2.7% in 2023, above expectations of 2.4% at the start of the year, but still below 3.3% in 2022 and weak relative to trend before the pandemic. A faster-than-expected reopening in China, a warm winter in Europe that keeps energy costs in check, and resilient US labor markets are the main drivers of the upward revision. The banking tensions are a last word and a warning about future risks, but for the moment they do not offset the positive sentiments”.

— Scott Johnson, economist

The Fund estimates that the world inflation rate will be 7% this year, 0.4 percentage points above the January projection, although below the 8.7% in 2022. The slowdown is due to the decline in commodity prices and the impact of interest rate hikes. For most countries, the pace of price growth will remain above central bank targets until 2025.

Inflation rates are expected to be lower in about 76% of countries in 2023 than in 2022 and slow down even more to 4.9% in 2024.

Although the financial turmoil appears under control for now, the IMF is concerned about the potential impact if conditions worsen significantly, Gourinchas told reporters.

adverse scenarios

In one of the scenarios, which the IMF describes as a “plausible alternative”, financial instability remains contained, but it affects conditions more than in the IMF base case and banks reduce lending. This would cause growth to slow to 2.5% in 2023, the weakest pace since 2001, excluding the first year of the covid-19 pandemic in 2020 and the global financial crisis of 2009.

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In a severe downturn scenario, where the probability is 25%, a major credit disruption could occur, and the pace of global expansion could slow to less than 2%, something that has only happened five times since 1970. Also there is a 15% chance that growth will be only 1%.

Other risks beyond the financial sector include inflation taking longer than expected to slow down, that the reopening of China faltered or that the war between Russia and Ukraine began.

“We see a lot of downside risk going forward,” Gourinchas said.

growth estimates

Other highlights of the report include:

  • The Fund slightly raised its growth forecast for advanced countries for 2023 to 1.3%, 0.1 percentage points higher than expected, driven by the strength of labor markets. But it is less than half the 2.7% expansion of 2022.
    • The projection for Japan was reduced to 1.3%, 0.5 percentage points less than in January, after a disappointing fourth quarter that is expected to last into this year
  • HE expects the US to grow by 1.6%0.2 percentage points more than in the previous projection
  • The IMF recorded its growth expectations for emerging markets and developing economies — which have a higher weight than advanced nations based on purchasing power parity — at 3.9%, down 0.1 percentage points from their previous projection
    • The biggest reduction among the major economies was for South Africa, with growth of just 0.1%, 1.1 percentage points less than the previous estimate
    • The biggest improvement was for Saudi Arabia, which the Fund now forecasts will expand 3.1%.0.5 percentage points more than in January, driven by large investment projects

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