The IMF announced on 11 April at the World Economic Outlook’s press briefing that the baseline forecast for global output growth is 0.1 percentage points lower than predicted in the January 2023 WEO Update, before rising to 3.0% in 2024.
“The world economy is still recovering from the unprecedented upheavals of the last three years, and the recent banking turmoil has increased uncertainties. We expect global output growth to fall from 3.4% last year to 2.8% in 2023, before rising to 3% in 2024, mostly unchanged from our January projections. Advanced economies are expected to see an especially pronounced growth slowdown from 2.7% in 2022 to 1.3% in 2023. Global headline inflation is set to fall from 8.7% in 2022 to 7% in 2023 on the back of lower commodity prices but underlying core inflation is proving to be stickier. Importantly, this outlook assumes that recent financial stresses remain contained,” said Pierre-Olivier Gourinchas, the IMF’s chief economist.
Much uncertainty clouds the short- and medium-term outlook as the global economy adjusts to the shocks of 2020–22 and the recent financial sector turmoil. Recession concerns have gained prominence, while worries about stubbornly high inflation persist.
“Once again, risks are heavily tilted to the downside, but they have risen with the recent financial turmoil. Most prominently, recent banking system turbulence could result in a sharper and more persistent tightening of global financial conditions. The simultaneous rate hikes across countries could have more contractionary effects than expected, especially as debt levels are at historical highs. There might be a need for more monetary tightening if inflation remains stickier than expected. These risks and more could all materialize at a time when policymakers face much more limited policy space to offset negative shocks, especially in low-income countries,” added Gourinchas.
The IMF says that policymakers have a narrow path to walk towards restoring price stability while avoiding a recession and maintaining financial stability. Achieving strong, sustainable, and inclusive growth will require policymakers to stay agile and be ready to adjust as information becomes available.
Gourinchas commented: “First, as long as financial stress is not systemic as it is now, the fight against inflation should remain the priority for central banks. Second, to safeguard financial stability, central banks should use separate tools and communicate their objectives clearly to avoid unwarranted volatility. Financial policies should remain laser focused on preserving financial stability and watch for any build-up of risks in banks, non-banks, and the real estate sectors.
“Third, in many countries fiscal policy should tighten to ease inflation pressures, restore debt sustainability, and rebuild fiscal buffers. Finally, in the event of capital outflows that raise financial stability risks, emerging market and developing economies should use the integrated Policy framework, combining temporary targeted foreign exchange interventions and capital flow measures where appropriate.”
Tobias Adrian, director of the Monetary and Capital Markets Department at the IMF, said: “We have all witnessed the recent events in the banking sector. These are powerful reminders of the challenges now being faced as we see tighter monetary policy and tighter financial conditions, at the same time, as financial sector vulnerabilities are building up. The immediate and forceful policy response reduced market anxiety, but sentiment remains fragile. Strains are still evident across other institutions as investors reassess the health of the financial system. The emergence of stress in financial markets also complicates the task of central banks as they seek to maintain the path towards higher interest rates in the face of stubbornly high inflation.”
Adrian added: “Looking beyond financial institutions, buffers built by households and corporations during the pandemic have given them more room to absorb financial shocks. But these buffers are deteriorating, leaving them vulnerable to defaulting on their debt. When we look at large emerging markets, we see that they have so far avoided adverse spill overs from the recent turmoil. However, as financial stresses intensify the sizable pull back from global risk taking could trigger capital outflows across emerging markets. For smaller and riskier emerging market economies, we see that they continue to face debt sustainability strains and funding challenges.”
He concluded: “The recent bank failures brought to light weaknesses in bank supervision and regulation, as well as failures in the bank’s internal risk management practices, in particular with respect to interest rate and liquidity risk. Supervisors should ensure banks have risk management and corporate governance that matches their risk profile.
“If financial strains intensify and threaten the health of the financial system amid high inflation, trade-offs between inflation and financial stability objectives may emerge. Policymakers should act swiftly to prevent any systemic event that may adversely affect market confidence in the resilience of the global financial system.”