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(Kitco News) The International Monetary Fund trimmed its 2023 global growth outlook and updated its medium-term expectations to the weakest in three decades, issuing "hard landing" warnings if interest rates remain higher for longer.
Gross domestic product is seen rising 2.8% this year and 3% next year - 0.1 percentage point less than the January forecast, according to the IMF's World Economic Outlook (WEO) report published Tuesday. In comparison, global growth expanded at 3.4% in 2022.
"The anemic outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, and growing geoeconomic fragmentation," the IMF said.
The IMF also said that global growth looks to be at 3% in 2028 - the lowest medium-term outlook since the WEO was first published in 1990.
"Turbulence is building, and the situation is quite fragile," said Pierre-Olivier Gourinchas, the IMF's chief economist. "Inflation is much stickier than anticipated even a few months ago. More worrisome is that the sharp policy tightening of the past 12 months is starting to have serious side effects for the financial sector."
The IMF estimate assumes that the recent financial sector risks are contained.
"The risks are weighted heavily to the downside, in large part because of the financial turmoil of the last month and a half," said Gourinchas. "That is under control as of now, but we are concerned that this could result in a sharper and a more elevated downturn if financial conditions were to worsen significantly."
The IMF pointed out that last year's U.K. government bond market turmoil and March's U.S. banking crisis are signs of "significant vulnerabilities ... among banks and non-bank financial institutions."
This is why risks to the outlook are "heavily skewed to the downside, with the chances of a hard landing having risen sharply," the IMF warned.
According to the updated forecasts, the U.S. economy is expected to grow by 1.6% this year, the euro zone to expand by 0.8%, and Britain to contract by 0.3%. Meanwhile, China's GDP is seen rising by 5.2% and India's by 5.9%. The Russian economy is forecasted to advance by 0.7% in 2023 after contracting more than 2% last year.
"The major forces that affected the world in 2022 — central banks' tight monetary stances to allay inflation, limited fiscal buffers to absorb shocks amid historically high debt levels, commodity price spikes and geoeconomic fragmentation with Russia's war in Ukraine, and China's economic reopening—seem likely to continue into 2023. But these forces are now overlaid by and interacting with new financial stability concerns," the IMF noted.
Bank failures in the U.S. are the consequences of a sharp rise in interest rates, the report pointed out. And that's one of the primary reasons why the IMF is now stressing the "hard landing" scenario.
"A hard landing — particularly for advanced economies — has become a much larger risk. Policymakers may face difficult trade-offs to bring sticky inflation down and maintain growth while also preserving financial stability," the IMF said.
Inflation is projected to remain sticky — with global headline inflation declining to just 7% from 8.7% this year.
"Our advice is for monetary policy to remain focused on bringing down inflation," IMF chief economist Pierre-Olivier Gourinchas told reporters.
In an additional analysis released along with the report, the IMF said that the high-interest rate environment is not here to stay. And once inflation is controlled, rates will again approach previous ultra-low levels.
Gold reacted positively to the news, with June Comex gold futures rising $12.80 on the day and trading at $2,016.60 an ounce.
