WASHINGTON – The global economy faces the risk of a painful recession amid concerns about the global banking system and rising interest rates that banks may cut back on lending, the International Monetary Fund said on Tuesday.
The warning followed weeks of turmoil in the global banking sector, including two bank failures in the United States and a Swiss government-brokered takeover of Credit Suisse by UBS. Fears that bank runs would ripple through the financial system have eased in recent weeks, but concerns remain that additional bank failures and tightening credit standards could dampen economic output around the world.
In its latest World Economic Outlook report, the IMF slightly lowered its growth forecast for 2023 to 2.8 percent from 2.9 percent in January. Growth for the year is expected to be much slower than the IMF forecast a year ago, which had projected output at 3.4 percent.
Growth forecasts for Japan, Germany and India have all been cut since the start of the year, when the IMF said a global recession was averted.
Both the IMF and the World Bank have raised warnings in recent weeks that the global economy is facing prolonged stagnation. The IMF expects growth to stay around 3 percent for the next five yearsThis is its weakest medium-term growth forecast since 1990.
On Tuesday, the IMF expressed confidence that a financial crisis could be averted, but it lamented that inflation was still elevated and the global economy was weak and faced a “rocky” path. It suggested that a so-called hard landing, which could plunge economies around the world into recession, was increasingly plausible.
“A hard landing – especially for advanced economies – has become a much bigger risk,” the IMF report said, adding, “The fog has thickened over the global economic outlook.”
The bleak forecast comes as top economic officials from around the world gather in Washington this week for the spring meetings of the IMF and World Bank. The meeting comes at a time of heightened uncertainty as Russia’s war in Ukraine escalates, prices remain stubbornly high around the world and debt burdens in developing countries raise unease about the prospect of debt repayment.
Treasury Secretary Janet L. Yellen is expected to meet with other international regulators this week to assess the IMF’s position. On Tuesday, he expressed confidence in the health of the U.S. banking system and economy, explaining that he continues to believe the outlook is brighter than many economists predicted last fall.
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“Here domestically, the U.S. banking system is doing well with strong capital and liquidity levels,” Ms. Yellen said during a news conference. “The global financial system is also resilient because of the significant reforms countries have taken since the financial crisis.”
Ms. Yellen said she was “alert” about the risks facing the economy, pointing to recent strains on banking systems in the United States and Europe and the possibility of a further downturn from Russia’s war in Ukraine. He said he did not currently see evidence that credit was shrinking, but acknowledged that it was possible.
“I don’t expect a downturn in the economy, although, of course, that remains a risk,” Ms. Yellen said.
The IMF has made a slight upgrade to its forecast for US output, which is now expected to be 1.6 percent in 2023.
Economists are still working to estimate what effects bank failures might have on the broader U.S. economy. Analysts at Goldman Sachs wrote in a research note this week that bank pressure could reduce lending by up to six percentage points, and that small businesses, which rely heavily on small and medium-sized banks, would bear the brunt of tighter lending.
The IMF attributed the pressure on the financial sector to banks with business models that rely heavily on the continuation of low interest rates and have failed to adjust to the rapid rate of increase over the past year. While the turmoil in the banking sector appears to be under control, the IMF noted that investors and depositors are 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 “significant impact on the global economy” if credit conditions tighten further and businesses and households have an even harder time borrowing.
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“Risks are again on the back burner, and massive, due to the financial turmoil of the past month and a half,” IMF chief economist Pierre-Olivier Gourinchas told a briefing ahead of the report’s release.
The IMF predicts global growth will slow to 1 percent this year, under the most extreme scenario of a sharp tightening of global credit conditions.
The financial system is not the only cloud hanging over the global economy. Gourinjas noted. There are hopes for strong growth in China’s reopening after strict pandemic regulations, and changes in that policy could cut output and disrupt international trade, he said. At the same time, Russia’s war in Ukraine threatens the reliability of food and energy supply chains.
The IMF has been playing a leading role in trying to stabilize the Ukrainian economy, and this month finalized a $15.6 billion loan package for Ukraine, the first financing program for a country embroiled in a major war. But despite Western efforts to crack down on Ukraine and weaken Russia, the IMF raised its outlook for the Russian economy, forecasting growth of 0.7 percent this year and 1.3 percent in 2024.
The IMF noted that Russia’s energy exports remain strong, allowing it to support its economy through government spending. With global oil prices falling amid recession fears, the impact of efforts by the US and Europe to push Russia’s oil prices above $60 a barrel is unclear. IMF officials said that due to low oil prices, Russian oil no longer trades at a deep discount and that Russia has succeeded in finding ways to avoid the price ceiling.
While it underscored the risks facing the global economy, the IMF urged central banks to maintain efforts to control prices while standing ready to stabilize the financial system, noting that inflation remains high relative to their targets.
Despite the IMF’s warnings about a hard landing, Ms. Yellen tried to start this week’s meetings on a hopeful note. He pointed to signs of slowing inflation and reasons for optimism about the resilience of the financial system.
“I would not exaggerate the negativity about the global economy,” Ms. Yellen said. “I think we need to be more positive.”
He added: “I think the outlook is reasonably bright.”
