IMF keeps GDP forecasts steady amid growing risk of hard landing

HOUSTON (ICIS)–The International Monetary Fund (IMF) warned on Tuesday about a growing risk of a hard economic landing, even as it kept its global GDP forecasts mostly unchanged from January.

The following table summarises the IMF’s latest GDP forecasts and compares them with those made in January and October.

Source: IMF

BANK CRISES
The IMF noted the financial stress caused by recent bank failures. Even though central banks had warned about aggressive increases in interest rates, they still caused stress in the world’s financial system. Gaps in regulations and supervision also caused problems.

The two US banks that failed were regional and specialised, the IMF said. Credit Suisse suffered from a collapse in confidence that led to a brokered takeover by competitor UBS. Depositors and investors are trying to figure out whether the problems could spread to other banks and financial institutions.

The IMF expects that banks will be able to handle higher rates and tighter monetary policy because they generally have strong liquidity and capital positions. The banks that will face problems will be those that adopted business models that assumed interest rates will remain unusually low.

Prior to the bank failures, the world’s economy was showing signs of stabilising following COVID-19 lockdowns in China and Russia’s invasion of Ukraine.

The IMF’s baseline scenario assumes that the recent turmoil in the financial sector will be contained. Commodity prices should fall because of lower demand, with prices for crude oil falling 24% year on year in 2023 and a further 5.8% in 2024.

Interest rates will remain elevated and governments will start withdrawing aid packages and other forms of fiscal stimulus.

RISK OF HARD LANDING
The IMF’s relatively stable outlook belies the growing risk of a hard landing, particularly among advanced economies.

Central banks around the world are tightening monetary policy in their attempt to get high inflation back to their targets, the IMF said. Debt remains high, which will limit the ability of governments to respond to economic shocks.

The world remains vulnerable to spikes in commodity prices as well as growing fragmentation as a result of Russia’s invasion of Ukraine. The outlook of China’s reopening remains unclear.

A banking crisis now has emerged amid all of these challenges.

“A hard landing – particularly for advanced economies – has become a much larger risk,” the IMF said. “Policymakers may face difficult trade-offs to bring sticky inflation down and maintain growth while preserving financial stability.”

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