The International Monetary Fund (IMF) has warned that rising interest rates and continued inflation could spark a severe banking crisis that triggers recession.
Its latest World Economic Outlook said that financial stability risks have “increased rapidly” over the last six months – and that the global economy is entering a “perilous phase” of low growth, rising risks, and inflation concerns.
The collapse of Silicon Valley Bank sent shockwaves across the US, while global investors are jittery following the near-collapse of Credit Suisse.
Pierre-Olivier Gourinchas, economic counsellor to the UN Agency, said: “We are entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner.”
“Once again, downside risks dominate. Nervous investors often look for the next weakest link, as they did with Credit Suisse,” he said.
There was now less than a 50% chance of meeting the IMF’s forecast of 2.8pc growth in the global economy this year, the agency predicted.
The IMF’s Global Financial Stability report also reported that stress on bank’s balance sheets could lead to severe reduction in lending.
Gourinchas said: “In such a severe downside scenario, global GDP per capita could come close to falling – an outcome whose probability we estimate at about 15pc.”
There is a one in 20 chance of a financial crisis that will send global GDP tumbling by 2.8pc, the IMF said.
Companies are finding it harder to borrow money as sharp rises in interest rates over the last 12 months impact on lending.
The IMF warned that stresses could re-emerge in the financial system. “Trust – the foundation of finance – could continue to erode. Funding could disappear rapidly for banks and nonbanks, and fears could spread, amplified by social media and private chat groups,” a spokesman said.
A slowing economy may leave pension funds and hedge funds exposed to the credit risk deterioration – and real estate funds could be particularly vulnerable as these funds have already seen large declines in their asset valuations, the IMF said.