Kristalina Georgieva, managing director of the IMF, yesterday during a conference in Washington.Jose Luis Magana (AP)
The world economy looks like an obstacle course in a thick fog.
After the pandemic came the war in Ukraine and when things seemed to look better, financial turmoil clouded the outlook.
After the upward revision of two tenths at the end of January, the International Monetary Fund (IMF) has lowered its growth forecast for the world economy by one tenth for this year, to 2.8%, according to its report Economic
Outlook presented this
in Washington at the organization's spring meetings.
Pierre-Olivier Gourinchas, the Fund's economic adviser and director of analysis, took the opportunity to stick out his chest and underline that in October the IMF already warned that the next risk on the list was that of a financial crisis.
All in all, the storm seems to be abating and the central scenario being handled by the agency is that the crisis caused by the fall of Silicon Valley Bank, Signature Bank and Credit Suisse is "contained".
Hence the impact on global forecasts is small.
The IMF lowers the growth forecast for 2024 by another tenth, to 3.0%.
Actually, the year had started with a handful of good news.
“The reopened Chinese economy is rebounding strongly.
Supply chain disruptions are dissipating, while war-related disruptions to energy and food markets are subsiding.
Simultaneously, the massive and synchronized tightening of monetary policy by most central banks should start to bear fruit, and inflation should return to close to the targets”, says Gourinchas.
However, “signals from early 2023 that the global economy could reach a soft landing—with falling inflation and stable growth—have faded amid stubbornly high inflation and recent financial sector turmoil” , says the report of the body led by Kristalina Georgieva.
After the 3.4% growth in 2022, the world economy will slow down this year because of the advanced countries, especially the European ones.
Growth in the euro zone will go from 3.5% in 2022 to 0.8% this year, according to IMF calculations, which even expects a contraction of 0.1% in Germany.
Spain, the furthest behind in the recovery from the pandemic, will grow by 1.5% this year, double that of Italy and France, but far from the 5.5% of 2022. And the United Kingdom will go from growing by 4% last year to a 0.3% drop in the economy in 2023. The United States is resisting better and goes from 2.1% in 2022 to 1.6% this year and 1.1% next year.
Meanwhile, growth will hardly slow down in the emerging countries as a whole and will speed up in some of them, with China and India as the main drivers.
Latin America, however, will also stop dead: after 4% in 2022, it will grow only 1.6% this year and 2.2% next year.
For Brazil, the IMF forecasts an increase in gross domestic product of 0.9% this year and 1.5% in 2023, while for Mexico the rates would be 1.8% and 1.6%.
Gourinchas warns that inflation has become more entrenched than expected.
The headline rate is falling sharply due to the step effect, discounting increases in energy and food prices from a year ago, when the war in Ukraine began.
However, core inflation, which excludes energy and food, has not yet peaked in many countries.
The Fund's chief economist underlines the resistance of the labor market to the tightening of monetary conditions.
He is not very convinced that there is a risk of an uncontrolled price-wage spiral.
He rather believes that companies have been able to defend margins by raising prices without improving wages at the same rate and that they should be able to absorb some recovery in real wages.
But beyond inflation, the other risk in which Gourinchas recreates is the financial one with a loud I-
“More worrying are the secondary effects that the abrupt tightening of the monetary policy of the last year is beginning to have in the financial sector, as we have repeatedly warned could happen.
Perhaps what is surprising is that it took so long, ”he says.
After a prolonged period of contained inflation and low interest rates, he explains, the financial sector had become too complacent about maturity and liquidity mismatches.
The rapid tightening of monetary policy in the past year has caused considerable losses in long-term fixed income assets and raised funding costs.
But in both the brief turmoil in the UK bond market last autumn and the recent US banking turmoil, “financial and monetary authorities have taken swift and forceful action and have so far avoided further instability”.
The financial storm, therefore, adds uncertainty, but for now it has not taken a very severe toll.
The IMF has calculated alternative scenarios.
In one, the banks, given the increase in financing costs and the need to act more prudently, further reduce loans, which would lead to subtracting three tenths of a point from growth this year.
In another, much more severe, a sharp tightening of global financial conditions leading to strong risk aversion "could have a dramatic impact on credit conditions and public finances, especially in emerging market and developing economies."
It would precipitate large capital outflows, a surge in risk premiums, an appreciation of the dollar in a race to safety, and large falls in global activity amid lower confidence, household spending and investment.
In such a scenario, which the IMF gives a 15% chance of happening, a bit harder than rolling a 6 on a dice, global growth could slow to just 1% this year.
For this reason, the IMF stresses that regulators and supervisors must act now to ensure that financial fragilities do not escalate into a full-blown crisis, by strengthening surveillance and actively managing market tensions.
It also indicates that in the event of a systemic financial crisis looming, it will be necessary to adjust economic and monetary policy to safeguard both the financial system and activity.
"It is important to underline that we are not in this situation, although further financial tremors are likely," underlines Pierre-Olivier Gourinchas.
More than discreet growth, inflation that refuses to abate and an increase in financial risks are harassing the recovery of an economy that is also facing a long phase of low growth, of the order of 3% per year in the next five years, the most low since 1990. A rocky road, says the Fund.
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