The outlook for the world economy this year has worsened because of high inflation, rising interest rates and uncertainty after the failure of two big American banks.
That’s the view of the International Monetary Fund — or IMF — which has lowered its outlook for global economic growth. The IMF now predicts growth this year of 2.8%, down from 3.4% in 2022 and down from its January estimate of 2.9%.
The IMF said the possibility of rising interest rates weakening growth so much as to cause a recession, has “risen sharply.”
The IMF is also predicting 7% global inflation this year, down from 8.7% in 2022 but up from its January estimate of 6.6%.
Continuing high inflation is expected to force central banks to keep raising rates and to keep them high longer to fight rising prices. Those higher borrowing costs are expected to weaken economic growth and possibly weaken banks that previously relied on low rates.
The IMF’s annual Global Financial Stability Report, also released recently, recommended international decision makers rethink the pace of interest rate raises.
The world economy has had a difficult three years. First, COVID-19 almost stopped global commerce in 2020. Then a surprisingly strong recovery caused inflation — which worsened after the Russian invasion of Ukraine increased prices of energy and grain.
Central banks responded by raising rates, but higher rates have caused problems for the financial system, which had grown used to low interest rates.
On March 10, Silicon Valley Bank failed after taking heavy losses in the bond market due to higher rates. Two days later, officials closed New York-based Signature Bank. The failures were the second- and third-largest in US history. As a result, US banks are expected to reduce lending, which could hurt economic growth.
The IMF says there is a 25% possibility global growth will fall below 2% for 2023. The IMF also says there is a 15% possibility of a situation in which worldwide economic output per person decreases — a situation often associated with global recession.