US banking turmoil will hurt global economies: IMF
-
Business reporter GAROWE ONLINE
- Posted On 14-04-2023, 05:22AM
WASHINGTON, USA - The International Monetary Fund (IMF) has warned that the global economies will be greatly affected by the declining US banking turmoil that raises uncertainties in the markets.
In its April 2023 World Economic Outlook update indicates that global output growth will decrease to 2.8 percent from 3.4 percent last year, before rising to 3 percent in 2024.
“Global headline inflation is set to fall from 8.7 percent in 2022 to 7 percent in 2023 on the back of lower commodity prices but underlying core inflation is proving to be stickier. Importantly, this outlook assumes that recent financial stresses remain contained,” said Pierre-Olivier Gourinchas, the IMF’s Chief Economist.
The IMF report further states that advanced economies are expected to see an especially pronounced growth slowdown to 1.3 percent in 2023 from 2.7 percent in 2022 as the world economy recovers from the unprecedented upheavals of the last three years and the ongoing jitters in the banking industry.
The impact of the fall of Silicon Valley Bank (SVB) earlier this year continues to send shockwaves across the global banking industry.
SVB’s failure marked the second-largest failure in US banking history and was quickly followed by the crash of Signature Bank, a New York-based financial institution that was deeply engaged in the volatile cryptocurrency industry.
Silicon Valley Bank, which had over $200 billion in total assets at the end of 2022, primarily provided banking services to venture-backed technology companies.
Swiss banking giant Credit Suisse, a financial giant that is considered to be of systemic importance to the global economy was forced to merge with its longtime rival, UBS, to stop the potential collapse.
Much uncertainty clouds the short- and medium-term outlook as the global economy adjusts to the shocks of 2020–22 attributable to the Covid-19 pandemic. Recession concerns have also gained prominence, while worries about stubbornly high inflation persist.
“Once again, risks are heavily tilted to the downside, they have risen with the recent financial turmoil. Most prominently, recent banking system turbulence could result in a sharper and more persistent tightening of global financial conditions.
This simultaneous rate hikes across countries could have more contractionary effects than expected, especially as debt levels are at historical highs. There might be a need for more monetary tightening if inflation remains stickier than expected. These risks and more could all materialize at a time when policymakers face much more limited policy space to offset negative shocks, especially in low-income countries,” added Gourinchas.
With the fog around current and prospective economic conditions thickening, policymakers have a narrow path to walk toward restoring price stability while avoiding a recession and maintaining financial stability. Achieving strong, sustainable, and inclusive growth will require policymakers to stay agile and be ready to adjust as information becomes available.
“First, as long as financial stress is not systemic as it is now, the fight against inflation should remain the priority for central banks. Second, to safeguard financial stability, central banks should use separate tools and communicate their objectives clearly to avoid unwarranted volatility.
Financial policies should remain laser-focused on preserving financial stability and watch for any buildup of risks in banks, non-banks, and the real estate sectors.
“Third, in many countries fiscal policy should tighten to ease inflation pressures, restore debt sustainability, and rebuild fiscal buffers. Finally, in the event of capital outflows that raise financial stability risks, emerging markets and developing economies should use the integrated Policy framework, combining temporary targeted foreign exchange interventions and capital flow measures where appropriate,” said Gourinchas.
GAROWE ONLINE
