The IMF has warned of a “hard landing” for the global economy if persistent and troublesome inflation keeps interest rates higher for longer and amplifies financial risks.

Although the fund left its overall economic forecast largely unchanged from January in its latest World Economic Outlook, released on Tuesday, it pointed to signs of resilience alongside falling global energy and commodity prices. foodstuffs masked a darker reality.

Pierre-Olivier Gourinchas, chief economist of the IMF, said: “Beneath the surface. . . the turbulence is rising and the situation is quite fragile.

“Inflation is much stickier than expected just a few months ago,” he said. “More worrying is that the strong [monetary] The monetary policy tightening of the past 12 months is starting to have serious side effects on the financial sector.

In its full six-month forecast released on Tuesday, the IMF said the turmoil in the UK government bond market last fall and the US banking turmoil last month showed the “significant vulnerabilities [that] exist among both banks and non-bank financial institutions”.

“Risks to the outlook are strongly tilted to the downside, as the odds of a hard landing have risen sharply,” the IMF said.

Gourinchas told the Financial Times that although the banking system was much more resilient than during the 2008 financial crisis, policymakers needed to “think about what could go wrong”.

“We can all remember the long time that elapsed between the failure of an individual institution, whether it was Bear Stearns or Countrywide,” he said, referring to institutions that failed there. is over ten years old. “Each time it was treated as an isolated incident, until it was no longer the case.”

New IMF forecasts showed a 25% chance that the global annual growth rate will fall below 2% in 2023, twice the risk of normal. The global economy has grown only slowly in the five calendar years since 1970.

If a large financial shock occurs – to which the IMF assigned a 15% risk – the fund said global growth would likely fall below the rate of population growth and lead to a global recession.

According to the IMF’s unchanged central forecast, the world economy is expected to grow by 2.8% in 2023, to reach 3% in 2024 and to remain at about this level until around 2028.

IMF Managing Director Kristalina Georgieva said last week it was the weakest medium-term outlook for the global economy since 1990.

Gourinchas told the FT the fund forecast “supercharged” growth in China, with other countries returning to a more normal pace. The IMF also assumes that global productivity will deteriorate as economies suffer from the “scarring” of the coronavirus pandemic and fragmentation amid geopolitical tensions.

The US economic forecast has been raised from the January forecast, and the fund now expects growth of 1.6% in 2023 and 1.1% in 2024. Three months ago, the IMF forecast a 1.4% increase this year, followed by a 1% expansion the following year.

The euro zone is expected to grow more slowly at 0.8% this year as member states grapple with last year’s energy price increases before recovering to a rate of 1.4% in 2024.

The IMF’s forecast growth rate of 5.2% in 2023 for China is in line with the Beijing government’s target, although the fund expects it to slow to 4.5% in 2024.

The IMF has called on central banks to continue working to bring inflation down and on governments to help by removing some of the fiscal support offered in recent years to deal with Covid-19 and the energy crisis.

As long as financial markets remain relatively stable, central banks should do all they can to fight inflation, the fund said. Gourinchas warned that price pressures could continue to prove more persistent, resulting in a “harder landing scenario”.

“There are concerns that we don’t have enough tightening in the system at this point and that more is needed,” he said. “It would certainly increase the chances of production falling further from our projections.”

However, a credit crunch, which some economists are predicting following last month’s U.S. banking turmoil, could act as a disinflationary force, he said.

“As long as it is orderly, some of this lending contraction may actually be beneficial in terms of reducing inflation and may substitute for further interest rate hikes.”

Janet Yellen, the US Treasury Secretary, was more optimistic about the outlook, seeking to allay fears of a “hard landing”.

She said she had not seen “evidence at this stage to suggest a credit crunch” after the banking sector turmoil, and noted that the US economy was “still doing exceptionally well”, with “creation continued strong job creation, with inflation gradually declining”. [and] robust consumer spending”.

“I wouldn’t overstate the negativism about the global economy,” Yellen told reporters. “I think the outlook is reasonably bright.”

Additional reporting by James Politi