The International Monetary Fund cuts growth forecasts amid tremors in the financial system

The International Monetary Fund said, on Tuesday, that the global economy faces increasing risks of a painful slowdown, amid concerns about the global banking system and fears that high interest rates will force banks to reduce lending.

The warning came after weeks of turmoil in the global banking sector, which included the failure of two banks in the United States and UBS’ acquisition of Credit Suisse brokered by the Swiss government. Concerns about bank spills spilling into the financial system have eased in recent weeks, but fears that more bank failures and tightening lending standards could slow economic output around the world.

In its latest World Economic Outlook, the International Monetary Fund made a slight downgrade in its growth forecast for 2023, lowering it to 2.8%, from 2.9% in January. Growth for this year is expected to be much slower than the International Monetary Fund forecast a year ago, when it projected output at 3.4 percent.

Growth forecasts for Japan, Germany and India have been cut since the start of the year, when the International Monetary Fund said a global recession was likely to be averted.

Both the International Monetary Fund and the World Bank have raised the alarm in recent weeks that the global economy is facing a period of prolonged recession. The IMF expects growth to hover around it 3% for the next five yearswhich is the weakest medium-term growth forecast since 1990.

On Tuesday, the International Monetary Fund expressed optimism that a financial crisis could be avoided, but lamented that inflation remains high and that the global economy remains fragile, facing a “bumpy” road ahead. She noted that a so-called hard landing, which could tip economies around the world into recession, was becoming increasingly plausible.

“A hard landing – especially for advanced economies – has become a much greater risk,” the IMF report said, adding that “the haze surrounding the global economic outlook has intensified.”

The muted outlook comes as top economic officials from around the world gather in Washington this week for the Spring Meetings of the International Monetary Fund and World Bank. The gathering is taking place at a time of high uncertainty, with Russia’s war dragging on in Ukraine, prices around the world remaining stubbornly high, and debt burdens in developing countries stoking anxiety about the possibility of default.

Treasury Secretary Janet L. Yellen is expected to meet with other international regulators this week to assess the state of the global financial system. On Tuesday, she expressed confidence in the US banking system and the health of the economy, making it clear that she still believes the outlook is brighter than many economists predicted last fall.

“Here at home, the US banking system remains intact, with strong capital and liquidity positions,” Yellen said during a news conference. “The global financial system also remains resilient due to the major reforms that countries took after the financial crisis.”

Ms. Yellen said she remains “vigilant” of the risks facing the economy, pointing to recent stresses on banking systems in the US and Europe and the potential for further fallout from Russia’s war in Ukraine. She added that she does not currently see evidence of credit contracting, but acknowledged that it is a possibility.

“I don’t see a downturn in the economy, although that still remains a risk of course,” Yellen said.

The International Monetary Fund has slightly updated its forecast for US production, which is now expected to be 1.6 percent for 2023.

Economists are still working to assess the potential effects of bank failures on the broader US economy. Analysts at Goldman Sachs wrote in a research note this week that bank pressures could reduce lending by as much as six percentage points and that small businesses, which rely heavily on small and medium-sized banks, could bear the brunt of tighter lending.

The International Monetary Fund attributed the pressure on the financial sector to banks with business models that relied heavily on continued low interest rates and failed to adapt to the rapid pace of increases last year. Although it appeared that the turmoil in the banking sector could be contained, the IMF noted that investors and depositors remained very sensitive to developments in the banking sector.

Unrealized losses at banks could lead to a “reasonable scenario” of additional shocks that could have a “potentially significant impact on the global economy” if credit conditions tighten further and businesses and households find it more difficult to borrow.

“The risks are once again heavily weighted to the downside, due in large part to the financial turmoil of the past month and a half,” Pierre-Olivier Gournchas, chief economist at the IMF, said at a press briefing ahead of the report’s release.

In a worst-case scenario, in which global credit conditions tighten sharply, the International Monetary Fund has forecast global growth to slow to 1% this year.

Mr. Gourinchas noted that the financial system was not the only cloud hanging over the global economy. He said hopes for stronger growth hinged on China reopening after strict pandemic regulations, and that changes in that policy could slow production and disrupt international trade. At the same time, Russia’s war in Ukraine continues to threaten the reliability of food and energy supply chains.

The International Monetary Fund plays a leading role in trying to stabilize Ukraine’s economy, and this month it finalized its $15.6 billion loan package to Ukraine, the first financing program of its kind for a country embroiled in a major war. But despite the efforts made by Western countries to support Ukraine and weaken Russia, the International Monetary Fund raised its forecast for the Russian economy, expecting it to grow 0.7 percent this year and 1.3 percent in 2024.

The International Monetary Fund noted that Russia’s energy exports continued to be strong, allowing it to prop up its economy through government spending. The impact of efforts by the United States and Europe to cap the price of Russian oil at $60 a barrel remains unclear because global oil prices have been falling amid fears of a recession. IMF officials said that because of low oil prices, Russian oil was no longer traded at the greatest discount and that Russia had successfully found ways to circumvent the price cap.

Even as it emphasized risks to the global economy, the IMF urged central banks to continue their efforts to contain prices while standing by to stabilize the financial system, noting that inflation remains too high for their targets.

Despite warnings from the International Monetary Fund about a hard landing, Ms. Yellen sought to open this week’s meetings on a note of optimism. She cited signs that inflation is declining and the resilience of the financial system as reasons for hope.

“I’m not going to be overly negative about the global economy,” Ms. Yellen said. “I think we should be more positive.”

“I think the outlook is reasonably bright,” she added.