The International Monetary Fund (IMF) released its April World Economic Outlook on Tuesday, and its researchers didnt hold back, warning that stubborn inflation could keep interest rates higher for longer, leading to a hard landing for the global economy. Their report contrasts with Goldman Sachs recent forecast that labor market rebalancing will enable a soft landing in the U.S.where inflation is tamed without sparking a recessionas well as Barclays February projection for a no landing scenario that involves resilient economic growth and higher inflation. And in some ways, the IMFs new outlook disregards a genuinely constructive trend on inflation.
Many central banks worldwide have made progress in their fight against rising consumer prices in recent months. In the U.S., year-over-year inflation dropped from its 9.1% June peak to just 6% in February. And the European Union saw its key inflation measure sink to 6.9% last month, from 8.5% in February. But the IMFs economists still believe inflation will be an issue for years to come. In developed economies, they forecast it will take until after 2024 for consumer price increases to fall to central banks 2% targetand the situation will be even worse for developing nations.
IMF
Global economic growth will also fall from 3.4% in 2022 to 2.8% in 2023, according to the IMF, before leveling off at 3% in 2024. The funds director, Kristalina Georgieva, noted last week that the forecast amounts to the weakest medium-term global growth projection in over 30 years.
On Tuesday, the IMFs chief economist Pierre-Olivier Gourinchas also warned that recent signs of economic strength and resilience in the wake of the banking crisis, including the historically low unemployment rate and steady economic growth in the U.S., arent telling the whole story.
Below the surfaceturbulence is building, and the situation is quite fragile as the recent bout of banking instability reminded us, Gourinchas wrote, adding that the odds of a recession have risen sharply.
Rising risks
Gourinchas and the IMF outlined several risks to the global economy that could cause a hard landing. First, they warned of the potential for financial sector stress to amplify after the recent banking crisis, arguing contagion could take hold, slowing lending and investment in the economy.
We have all witnessed the recent events in the banking sector. These are powerful reminders of the challenges now being faced as we see tighter monetary policy and tighter financial conditions, Tobias Adrian, director of the monetary and capital markets department at the IMF, said in a press release Tuesday, noting that financial sector vulnerabilities are building up.
Adrians statement contrasts with Treasury Secretary Janet Yellens comments last month, when she argued that the U.S. banking system is sound and the post-crisis situation is stabilizing. Yellen brushed aside the after effects of the crisis again this week, telling reporters in Washington D.C. Tuesday that the economy is even better off than it was six months ago as well.
Despite Yellens outlook, the IMFs economists argued there is a 15% chance of another financial shock coming from the banking crisis, and if that occurs, a global recession would be unavoidable.
Adrian also warned that rising stress in financial markets could make central banks fight against inflation even more complicated. Thats a problem, because according to Gourinchas, inflation is much stickier than anticipated even a few months ago.
While global inflation has declined, that reflects mostly the sharp reversal in energy and food prices, he wrote, noting that core inflation, which excludes more volatile energy and food prices, has not yet peaked in many countries and remains well above target.
The IMF also detailed how fragmentation into geopolitical blocs could slow economic growth globally by reducing foreign direct investment. And Gourinchas argued that pockets of sovereign debt distress could, in the context of higher borrowing costs and lower growth, spread and become more systemic.
Policymakers have a narrow path to walk to improve prospects and minimize risks, he wrote. Central banks need to remain steady with their tighter anti-inflation stance, but also be ready to adjust and use their full set of policy instrumentsincluding to address financial stability concernsas developments demand.
