The International Monetary Fund has warned of a “hard landing” for the global economy if persistently troubling inflation keeps interest rates high for longer and magnifies financial risks.

Although the Fund left its overall economic forecasts largely unchanged for January in its latest World Economic Outlook, published on Tuesday, it stressed that signs of resilience along with lower global energy and food prices mask a darker reality.

“Below the surface . . . turmoil is building, and the situation is very fragile,” said Pierre-Olivier Gourenchas, chief economist at the International Monetary Fund.

“Inflation is much more difficult than expected even a few months ago,” he said. “The most worrying thing is that sharp [monetary] The policy tightening over the past 12 months has started to have serious side effects on the financial sector.”

The International Monetary Fund, in its twice-yearly full outlook published on Tuesday, said the turmoil in the British government bond market last fall and the US banking turmoil last month showed “significant vulnerabilities”. [that] exist between banks and non-bank financial institutions.”

“The risks to the outlook are heavily tilted to the downside, with chances of a hard landing rising sharply,” the IMF said.

Gourinchas told the Financial Times that while the banking system was much more resilient than it was during the 2008 financial crisis, policymakers had to “think about what could happen”.

“We can all remember the long period between the failure of an individual institution, whether it be Bear Stearns or Countrywide,” he said, referring to institutions that failed more than a decade ago. “Each time, this was treated as an isolated incident, until it didn’t happen.”

The International Monetary Fund’s new projections showed that there is a 25 percent chance that the annual global growth rate could fall below 2 percent in 2023, a risk twice as large as usual. The global economy has grown only slowly in the five calendar years since 1970.

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In the event of a major financial shock — something the IMF has put a risk of at 15 percent — the fund said global growth would likely fall below the rate of population growth and lead to a global recession.

In the central unchanged forecast of the International Monetary Fund, the global economy is expected to grow by 2.8 percent in 2023, increase to 3 percent in 2024 and remain at approximately this level until 2028.

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

Gorenchas told the Financial Times that the fund expects “supercharged” growth in China as other countries return to a more normal rate. The IMF also assumes that global productivity will decline while the coronavirus pandemic “scars” economies and fragments amid geopolitical tensions.

The US economic outlook has been revised up against January’s forecast, and the Fund now expects growth of 1.6 percent in 2023 and 1.1 percent in 2024. Three months ago, the IMF was forecasting a 1.4 percent increase this year followed by 1 percent in the previous year. the next.

The eurozone is expected to grow more slowly at 0.8 percent this year as member states deal with last year’s energy price increases before recovering to 1.4 percent in 2024.

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

The International Monetary Fund called on central banks to continue working to reduce inflation, and also called on governments to help by removing some of the financial support provided in recent years to deal with Covid-19 and the energy crisis.

As long as financial markets remain relatively stable, the fund said, central banks should do everything they can to beat inflation. Gorinchas warned that price pressures could continue to prove more persistent, which could lead to a “more difficult downside scenario”.

“There is a concern that we may not have enough tightening in the regime at this point and more will be needed,” he said. “That would certainly increase the odds of a further drop in production relative to our expectations.”

However, the credit crunch, which some economists expect in the wake of last month’s US banking turmoil, could act as a disinflationary force, he said.

“As long as it’s orderly, some of this deflation in lending could actually be helpful in terms of lowering inflation and could be a substitute for higher interest rates.”

Janet Yellen, US Treasury Secretary, was more optimistic about the outlook, as she sought to ease fears of a “hard landing”.

It said it had not seen “evidence at this point of a contraction in credit” after the banking sector turmoil, and noted that the US economy continues to be “functioning very well”, with “continuing strong job creation, and inflation gradually coming down”. [and] Strong consumer spending.

“I will not be overly negative about the global economy,” Yellen told reporters. “I think the outlook is reasonably bright.”

Additional reporting by James Politi