The start of this year saw economists and business leaders expressing optimism that the global economy might not slow as much as they feared. Positive developments include China's reopening and signs of resilience in Europe.
A crisis in the banking industry that emerged last week has altered the equation. The International Monetary Fund has downgraded their forecasts for global economic growth, citing 'the recent rise in financial market volatility'.
IMF expects the economic growth to decline from 3,4% in 2022 down to 2,8% in 2023. In January, the IMF had estimated 2.9% growth for this year.
In its latest report, the organization stated that 'uncertainty remains high and the balance of risk has shifted to the downside as long as the financial industry is unstabilized'.
The economic outlook has become more bleak following the March failures of Silicon Valley Bank (SVB) and Signature Bank (SB), two regional US banks, as well as the lack of confidence in Credit Suisse, a much larger lender, which was sold by the government to UBS, a rival bank, in a rescue deal.
The global economy is already dealing with the effects of persistent high inflation, rapid increases in interest rates in order to combat it, and the elevated levels of debt and the Russian war in Ukraine.
Concerns about the state of the banking sector have now been added to the list.
The IMF noted that policymakers who want to avoid a hard landing' or painful recession may have to make difficult choices.
The IMF has said that global inflation is'much sticky than anticipated'. It is expected to drop from 8.7% by 2022 to 7.7% this year, and then to 4.9% by 2024.
Forecasts that change
Investors continue to look for new pockets of vulnerability within the financial sector. Lenders may also be more cautious to conserve cash that they might need in an uncertain environment.
This would limit the ability of businesses and households alike to obtain loans, which in turn would have a negative impact on economic growth over time.
The IMF said that 'financial conditions are tightening, and if this trend continues, it will likely lead to lower lending, and activity'. This week, the IMF is hosting its spring meeting with the World Bank.
The IMF has warned that if another shock to the financial system of the world results in a deterioration of financial conditions which is'sharp,' global growth may slow down to 1% in this year. This would result in a 'near stagnant' income per capita. The group estimated that the likelihood of this occurring was 15%.
In this climate, the IMF admitted that forecasting is difficult. It said that the 'fog surrounding world economic prospects has thickened'.
It warned that the weak growth was likely to continue for many years. Global growth for 2028 is forecast at 3%. This is the lowest mid-term estimate since 1990.
IMF said that this slowdown was due in part to the scarring caused by the pandemic as well as aging workers and geopolitical fragmentation. They cited the UK's decision to exit the European Union and the economic tensions between China and the United States, and Russia's invasion into Ukraine.
The IMF said that once the current period of high inflation is over, interest rates will likely return to pre-pandemic levels in advanced economies.
The World Bank's projection for growth in the world this year has now been surpassed by the body. David Malpass, outgoing World Bank President, told reporters on Monday that the group saw a 2% increase in output by 2023. This is up from the 1.7% forecast in January.
Olesya Dmitracova is the author of this report.