The International Monetary Fund (IMF) has revised its 2023 global growth outlook downward, citing higher interest rates and banking turmoil. Despite strong policy actions containing the risks of banking system contagion, the IMF warns that a severe flare-up of financial system turmoil could slash output to near recessionary levels. The organization’s latest World Economic Outlook report forecasts global real GDP growth at 2.8 percent for 2023 and 3 percent for 2024, a sharp slowdown from 3.4 percent growth in 2022 due to tighter monetary policy.
The IMF’s US outlook has improved slightly, with growth in 2023 forecast at 1.6 percent, but it has cut forecasts for major economies such as Germany and Japan. The organization has also raised its 2023 core inflation forecast to 5.1 percent, saying it has yet to peak in many countries despite lower energy and food prices. IMF chief economist Pierre-Olivier Gourinchas emphasized the need for monetary policy to stay focused on price stability to keep inflation expectations in check.
The IMF’s report highlights several downside risks, including a significant worsening of financial conditions, persistently high inflation, the escalation of Russia’s war in Ukraine, and setbacks in China’s recovery from COVID-19. The organization notes that a major banking crisis is not included in its baseline forecast, but it warns that a significant worsening of financial conditions could recur as nervous investors try to test the “next weakest link” in the financial system.
MF chief economist Pierre-Olivier Gourinchas
The IMF included two analyses showing financial turmoil causing moderate and severe impacts on global growth. In a “plausible” scenario, stress on vulnerable banks creates a situation where funding conditions for all banks tighten, due to greater concern for bank solvency and potential exposures across the financial system. This could slice 0.3 percentage points off of global growth for 2023, cutting it to 2.5 percent. In a severe downside scenario, financial turmoil could slash 2023 growth by as much as 1.8 percentage points, reducing it to 1.0 percent.
The IMF’s forecasts do not include the impact of a recent oil output cut by OPEC+ countries that has caused oil prices to spike. The organization assumes an average 2023 global oil price of $73 per barrel, but IMF chief economist Pierre-Olivier Gourinchas noted that it is unclear if this level can be sustained. For every 10 percent 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.
The IMF’s five-year growth outlook for 2028 has also been revised downward, 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 US-China tensions and Russia’s war in Ukraine.
