IMF Lowers its World Growth Forecast as Financial Risks Rise

There has been a downward revision to IMF's global growth forecasts, as the financial-sector stress has been added to pressures stemming from tighter monetary policy and the invasion of Ukraine by Russia, leading to an increase in uncertainty and risk.

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In a quarterly update to its World Economic Outlook, the International Monetary Fund said that the gross domestic product is likely to grow by 2.8% this year and by 3% next year, both of which is 0.1 percentage points lower than what was forecast in January. In 2022, the economy is expected to expand by 3.4%, compared with 3.4% in 2021.

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As a result of last month's unexpected failures of Silicon Valley Bank and Signature Bank, as well as the collapse of Credit Suisse Group AG, markets were roiled and financial stability concerns were ignited, compounding central banks' efforts to control inflation and maintain growth as well as the health of the banking system as a whole.

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"There is a significant weighting of risks to the downside, in part due to the financial turmoil that has been going on for the last month and a half," said Pierre-Olivier Gourinchas, the fund's chief economist. "The situation is under control at the moment, but we are concerned that if financial conditions should deteriorate significantly in the future, this could lead to a sharper and more elevated downturn."

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According to Gourinchas, during a briefing on Tuesday, "There may still be some hidden vulnerabilities that lurk, which is why it is crucial at this point that financial supervisors, regulators, and authorities take a very close look at any pockets of vulnerability that may still be prevalent, whether they are in the banking sector, non-bank financial institutions, or even more broadly.”

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While the reduction in the 2023 forecast isn't very significant, it showed that the IMF has a more subdued attitude toward the outlook than it did in January, when it said this year would be a "turning point" for the global economy and that risks were more balanced. 

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The International Monetary Fund (IMF) warned last week that growth will be limited over the next five years. A number of factors are contributing to this projection, including the threat of economic fragmentation resulting from geopolitical tensions - including the escalating rivalry between the US and China that has been boosted by the war in Europe - as well as a slower labor force growth and decelerating long-term rates of economic expansion in China and South Korea.

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Despite the fact that the International Monetary Fund (IMF) has lowered its estimate for global growth, the World Bank has upgraded its outlook to 2% from 1.7% in January, due to a stronger expansion in the Chinese economy, President David Malpass said Monday. 

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The fund predicts that global inflation will average 7% this year, which is 0.4 percentage points higher than the January projection but is still down from the 8.7% predicted for 2022. Several factors are contributing to the slowdown, including declining commodity prices and the effect of rising interest rates. Until 2025, it is expected that most countries will continue to see price growth that is higher than the central bank's objectives.

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Around 76% of countries are expected to have lower inflation rates in 2023 than they did in 2022, and they are forecast to slow down further to 4.9% in 2024.

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As of now, the IMF is concerned about the potential impact of a severe deterioration in financial conditions, Gourinchas told reporters, even though the situation appears to have stabilized so far.

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Adverse Scenarios

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The IMF describes one scenario, which it calls a "plausible alternative," in which financial instability remains contained, however, impacts conditions more than in the IMF's base case scenario, and banks reduce lending as a result. In 2023, this would result in the economy growing at the slowest pace it has been since 2001, excluding the first year of the Covid-19 pandemic in 2020 as well as the global financial crisis of 2009.

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As a severe downside scenario, which has about a 25% probability of happening, there could be significant disruption to credit, and the pace of global expansion could slow to less than 2% - which has only happened five times since 1970. It's also estimated that at just 1%, there's about a 15% probability of growth.

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The other risks are beyond the financial sector, such as inflation taking longer than expected to slow, China's reopening faltering, or a worsening of the Russian-Ukrainian conflict.

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Gourinchas pointed out that there are a lot of downside risks going forward.

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Growth Estimates

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Other highlights from the report include: 

• Based on strong labor markets, the fund raised its outlook for 2023 growth for advanced nations marginally to 1.3%, 0.1 percentage points higher than what it had previously predicted. That is less than half of the 2.7% growth that was expected in 2022.
• Japan's forecast declined to 1.3%, 0.5 percentage points lower than the forecast made in January. This was following a disappointing fourth quarter that was expected to carry over into this year.
• A growth rate of 1.6% is expected for the US, which is 0.2 percentage points higher than the previous projection.
• There was a 0.1 percentage point cut in IMF's growth projections for emerging markets and developing economies - which are weighted more heavily in purchasing power parity terms than advanced nations - from 3.9% to 3.9%, which was 0.1 percentage points lower than its previous forecast.
• One of the biggest reductions among the major economies was South Africa, with an estimated growth rate of just 0.1%, a reduction of 1.1 percentage points from its previous estimate.
• There was the biggest boost for Saudi Arabia, with the fund now predicting a 3.1% growth rate, 0.5 percentage points higher than what was seen in January, as a result of large investment projects.