The IMF warns that the banking crisis increases risks and tarnishes the outlook for the world economy

() — Earlier in the year, economists and corporate leaders expressed their optimism that global economic growth might not slow down as much as they feared. Positive developments included the reopening of China, signs of resilience in Europe and falling energy prices.

But a crisis in the banking sector that emerged last month the calculation has changed. The International Monetary Fund lowered its forecasts for the world economy on Tuesday, noting “the recent increase in volatility in financial markets.”

The IMF now expects economic growth to slow from 3.4% in 2022 to 2.8% in 2023. Its estimate in January had been for growth of 2.9% this year.

“Uncertainty is high, and the balance of risks has shifted firmly to the downside as long as the financial sector remains unstable,” the organization said in its latest report.

Fears about the economic outlook rose after the March collapses of Silicon Valley Bank and Signature Bank, two regional US lenders, and the loss of confidence in the much larger Credit Suisse, which was sold to rival UBS in a government-backed bailout deal.

The global economy was already dealing with the consequences of persistently high inflation, interest rates being rapidly raised to combat it, high debt levels, and Russia’s war in Ukraine.

Now, concerns about the health of the banking industry join the list.

“These forces are now overlapping and interacting with new concerns about financial stability,” the IMF said, noting that policymakers trying to control inflation while avoiding a “hard landing” or a painful recession “may face difficulties commercial”.

Global inflation, which the IMF said was proving “much more rigid than anticipated”, is expected to fall from 8.7% in 2022 to 7% this year and 4.9% in 2024.

changing forecasts

Investors are looking for additional pockets of vulnerability in the financial sector. Meanwhile, lenders may become more conservative to preserve the cash they may need to deal with an unpredictable environment.

That would make it harder for businesses and households to access loans, hurting economic output over time.

“Financial conditions have tightened, which is likely to imply a decline in lending and activity if they persist,” said the IMF, which is holding its spring meeting with the World Bank this week.

If another shock to the global financial system results in a “sharp” deterioration in financial conditions, global growth could slow to 1% this year, the IMF has warned. That would mean “nearly stagnant per capita income.” The group put the probability of this happening at around 15%.

The IMF recognized that forecasting was difficult in this climate. The “fog around the global economic outlook has thickened,” he said. And he warned that weak growth would likely persist for years. Looking to 2028, global growth is estimated at 3%, the lowest medium-term forecast since 1990.

The IMF said this slowness is partly due to scars from the pandemic, an aging workforce and geopolitical fragmentation, pointing to Britain’s decision to leave the European Union, economic tensions between the United States and China and Russia’s invasion of Ukraine.

Interest rates in advanced economies are likely to return to their pre-pandemic levels once the current period of high inflation has passed, the IMF also said.

The agency’s forecast for global growth this year is now closer to that of the World Bank. David Malpass, the outgoing World Bank president, told reporters on Monday that the group now saw a 2% expansion in output in 2023, up from 1.7% forecast in January, Reuters reported.

— Olesya Dmitracova contributed to this report.