The International Monetary Fund (IMF) warned on Tuesday that hidden vulnerabilities in the financial system could lead to a new crisis and hurt global growth this year, but urged member countries to continue tightening monetary policy to fight inflation which remains high.
The warnings set an ominous tone at the IMF and World Bank meetings in Washington this week, with conflicting economic and market forces clouding the political path as growth slows in response to rapid hikes in central bank interest rates.
The IMF on Tuesday lowered its global growth forecast for 2023, with its baseline assumptions ruling out, for the moment, major new events of turbulence in the financial system following the collapses of US banks Silicon Valley Bank and Signature Bank a March, and the forced sale of Credit Suisse from Switzerland.
The fund’s forecast calls for real GDP growth of 2.8% in 2023 and 3.0% in 2024, one-tenth of a percentage point lower than the January forecast for each year. The global economy grew by 3.4% in 2022.
The downgrades reflected weaker performances in some larger economies such as Japan, Germany, India and Brazil, offsetting a stronger performance in the US and a smaller contraction in the UK. The IMF also cited expectations of tighter financial conditions this year.
But his forecast was dominated by downside risks, including even higher inflation, an escalation of the war in Ukraine and a severe downside scenario from a new financial crisis that could lead to sharp reductions in lending and government spending. families and a race for the safest assets. . The latter factor could reduce global growth to around 1% this year, effectively representing a recession based on per capita GDP.
The IMF’s Global Financial Stability Report warned of a “dangerous combination of vulnerabilities” in financial markets, saying some participants had not adequately prepared for the impact of interest rate hikes.
Those risks have rapidly increased following last month’s turmoil in the global financial system, with investors remaining jittery and some looking for the next weakest link that could spread contagion, IMF officials said.
“Even if you think that, on average, banks have a lot of capital and liquidity, there can be these weak institutions that spill over into the system as a whole,” said Tobias Adrian, director of the IMF’s money and capital markets department. he told Reuters.
Despite the warnings, IMF chief economist Pierre-Olivier Gourinchas said inflation was still the bigger problem and that price stability should trump financial stability risks to central bank monetary policy. Only in the event of a very serious financial crisis should these priorities be reversed, he said at a press conference.
US Treasury Secretary Janet Yellen responded to the IMF’s outlook, saying at a separate news conference that the outlook was “pretty good,” although she said she was “vigilant” about downside risks, including banking pressures and the war in Ukraine.
“I wouldn’t overstate the negativity from the global economy,” Yellen said, adding that several economies, including the United States, are proving resilient with strong labor markets that ease supply chain issues and reduce energy costs.
Source: Terra
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