According to the latest World Economic Outlook from the International Monetary Fund (IMF), the global economy is now in a precarious position, with the threat of a worldwide recession increasing.
The IMF warned that rising interest rates could trigger a severe banking crisis, heightening financial stability risks that have rapidly increased over the past six months. Pierre-Olivier Gourinchas, an economic counsellor to the IMF, expressed concern, stating that the global economy is entering a dangerous phase, with financial risks on the rise while economic growth remains low.
The warning from the IMF follows last month’s twin banking crises in the US and Europe, which resulted in the collapse of Silicon Valley Bank and UBS’s takeover of Credit Suisse to avert its collapse. The IMF also highlighted that inflation threats were growing, leading to less than a 50% chance of meeting the IMF’s projected 2.8% growth this year.
The IMF’s Global Financial Stability report revealed that stress on bank balance sheets could lead to a severe reduction in lending, with the world now facing a one in seven chance of this happening.
There is also a one in 20 chance of a financial crisis that could result in a 2.8% fall in global GDP. The IMF warned that sharp interest rate hikes over the last year are beginning to affect the financial system, making it more challenging for companies to secure loans.
Financial institutions that have high exposure to interest rates or are heavily reliant on short-term funding, have borrowed extensively relative to their size, or are pension funds or hedge funds, are particularly at risk of tipping into a crisis. Real estate funds are also considered particularly vulnerable.
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