The outlook for the world economy for this year looks uncertain due to high inflation, rising interest rates and fallout from the collapse of two major US banks, says an International Monetary Fund report released Tuesday.
The institution reduced its global economic forecast for this year, and now predicts that growth will be 2.8%, a reduction from the 3.4% registered in 2022 and the 2.9% that it had estimated for this year in January.
The fund said the possibility of a “hard landing”, in which rising interest rates inhibit economic growth to the point of causing a recession, has “markedly increased”, especially in wealthier countries.
“Inflation is higher than anticipated a few months ago,” Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote in the most recent World Economic Outlook released by the institution.
The IMF, a lending organization to 190 countries, forecasts global inflation of 7% this year, down from 8.7% in 2022 but up from the 6.6% forecast in 2023.
Persistently high inflation will likely force the Federal Reserve and other central banks to keep raising rates and keep them higher for longer. Higher credit costs are likely to stifle economic growth and could destabilize banks that have relied on historically low rates.
Of course, warned Gourinchas, high interest rates “are beginning to have serious effects on the financial sector.”
The IMF sees a 25% chance that global economic growth will fall below 2% in 2023. This has happened just five times since 1970, most recently when the COVID-19 pandemic halted world trade in 2020.
The IMF also forecasts a 15% probability of a “severe contraction”, commonly associated with a global recession, in which world economic output per capita would decline.
The global economy, the fund warned in its report on Tuesday, “is entering a dangerous phase in which economic growth remains low by historical standards and financial risks have increased, but inflation has not yet begun to abate.”
The institution offered slightly better forecasts for the US and European economies, which have proven more resilient than expected despite high interest rates and the economic fallout from Russia’s invasion of Ukraine.
