The IMF's U.S. outlook improved slightly, with growth in 2023 forecast at 1.6% versus 1.4% forecast in January as labor markets remain strong. But the Fund cut forecasts for some major economies including Germany, now forecast to contract 0.1% in 2023 and Japan, now forecast to grow 1.3% this year instead of 1.8% forecast in January. The IMF raised its 2023 core inflation forecast to 5.1%, from a 4.5% prediction in January, saying it had yet to peak in many countries despite lower energy and food prices. "Our advice is for monetary policy to remain focused on bringing down inflation," IMF chief economist Pierre-Olivier Gourinchas told reporters. In a Reuters interview, Gourinchas said central banks should not halt their fight against inflation because of financial stability risks, which look "very much contained."
BANKING TURMOIL SCENARIOS While a major banking crisis was not in the IMF's baseline, Gourinchas said a significant worsening of financial conditions "could result in a sharper and more elevated downturn." The report included two analyses showing financial turmoil causing moderate and severe impacts on global growth. In a "plausible" scenario, stress on vulnerable banks - some like failed Silicon Valley Bank and Signature Bank burdened by unrealized losses due to monetary policy tightening and reliant on uninsured deposits - creates a situation where "funding conditions for all banks tighten, due to greater concern for bank solvency and potential exposures across the financial system," the IMF said. This "moderate tightening" of financial conditions could slice 0.3 percentage point off of global growth for 2023, cutting it to 2.5%. The Fund also included a severe downside scenario with much broader impacts from bank balance sheet risks, leading to sharp cuts in lending in the U.S. and other advanced economies, a major pullback in household spending and a "risk-off" flight of investment funds to safe-haven dollar-denominated assets. Emerging market economies would be hit hard by lower demand for exports, currency depreciation and a flare-up of inflation.
This scenario could slash 2023 growth by as much as 1.8 percentage points, reducing it to 1.0% - a level that implies near-zero GDP growth per capita. The negative impact could be about one-quarter of the recessionary impact of the 2008-2009 financial crisis. Other downside risks highlighted by the IMF include persistently high inflation that requires more aggressive central bank rate hikes, escalation of Russia's war in Ukraine, and setbacks in China's recovery from COVID-19, including worsened difficulties in its real estate sector.
OIL PRICE RISK
The IMF forecasts do not include the impact of a recent oil
output cut by OPEC+ countries that has caused oil prices to
spike. It assumes an average 2023 global oil price of $73 per
barrel - well below Monday's $84 Brent crude futures
price, but Gourinchas said it was unclear if this level could be
sustained.
For every 10% rise in the price of oil, IMF models show a
0.1 percentage point reduction in growth and a 0.3 percentage
point increase in inflation, Gourinchas added.
The IMF also now pegs global growth at 3% in 2028, its
lowest five-year growth outlook since the WEO was first
published in 1990, reflecting naturally slowing growth as some
emerging economies mature, but also slower growth in workforce
populations and fragmentation of the global economy along
geopolitical lines, marked by U.S.-China tensions and Russia's
war in Ukraine.
(Reporting by David Lawder; Editing by Andrea Ricci)
