According to the International Monetary Fund’s (IMF) latest World Economic Outlook report, the world economy faces the growing risk of a painful slowdown due to worries over the global banking system and rising interest rates that could force banks to reduce lending. The I.M.F. report revealed that additional bank failures and tightening lending standards could slow economic output around the world. Growth projections for Japan, Germany and India have all been lowered. The IMF expects growth to hover around 3 percent for the next five years, which is its weakest medium-term growth forecast since 1990. However, the IMF expressed optimism that a financial crisis could be averted, but it lamented that inflation was still elevated and that the global economy remained fragile, facing a “rocky” road ahead. The report suggested that a so-called hard landing, which could entail economies around the world tipping into recession, was increasingly plausible. Treasury Secretary Janet L. Yellen is expected to meet with other international regulators this week to assess the state of the global financial system.
The IMF attributed the strain on the financial sector to banks that relied heavily on a continuation of low interest rates and failed to adjust to the rapid pace of increases in the last year. Although it appears that the turbulence in the banking sector might be contained, the IMF noted that investors and depositors remained highly sensitive to developments in the banking sector. Unrealized losses at banks could lead to a “plausible scenario” of additional shocks that could have a “potentially significant impact on the global economy” if credit conditions tighten further and businesses and households have an even harder time borrowing.
The risks are again heavily weighted to the downside and in large part because of the financial turmoil of the last month and a half,” said Pierre-Olivier Gourinchas, the IMF’s chief economist. In the most severe scenario, in which global credit conditions tighten sharply, the I.M.F. projected that global growth could slow to 1 percent this year.
Banks with business models that relied heavily on a continuation of low interest rates and failed to adjust to the rapid pace of increases in the last year were responsible for the strain on the financial sector, according to the IMF. Despite this, analysts at Goldman Sachs wrote in a research note this week that bank stress could reduce lending by as much as six percentage points and that small businesses, which rely heavily on small and midsize banks, could bear the brunt of tighter lending.
Mr. Gourinchas noted that the financial system was not the only cloud hanging over the global economy. Hopes for stronger growth have been hinging on China’s reopening after strict pandemic regulations, and changes to that policy could slow output and disrupt international commerce. At the same time, Russia’s war in Ukraine continues to threaten the reliability of food and energy supply chains.
The report highlights that the risks are heavily weighted to the downside, and the uncertainty surrounding the future of the global economy has increased. The report’s reduced growth forecast and concerns about the banking system and inflation further amplify the uncertainty of the global economic landscape. The report suggests a “rocky” road ahead and a hard landing for advanced economies, which could lead to a global recession.