(MENAFN) The International Monetary Fund (IMF) has slightly trimmed its global growth outlook for 2023 due to higher interest rates cooling activity but has warned of severe financial system turmoil that could slash output to near-recessionary levels. In its latest World Economic Outlook report, the IMF highlighted that banking system contagion risks were contained by strong policy actions after the failures of two US regional banks and the forced merger of Credit Suisse. However, the turmoil added another layer of uncertainty alongside stubbornly high inflation and spillovers from Russia's war in Ukraine.

The IMF is now forecasting global real GDP growth at 2.8 percent for 2023 and 3.0 percent for 2024, marking a sharp slowdown from 3.4 percent growth in 2022 due to tighter monetary policy. Both the 2023 and 2024 forecasts were marked down by 0.1 percentage points from estimates issued in January, partly due to weaker performances in some larger economies as well as expectations of further monetary tightening to battle persistent inflation.

The IMF's US outlook improved slightly, with growth in 2023 forecast at 1.6 percent versus 1.4 percent forecast in January as labor markets remain strong. However, the Fund cut forecasts for some major economies, including Germany, now forecast to contract 0.1 percent in 2023, and Japan, now forecast to grow 1.3 percent this year instead of 1.8 percent forecast in January.

The IMF raised its 2023 core inflation forecast to 5.1 percent, from a 4.5 percent prediction in January, saying it had yet to peak in many countries despite lower energy and food prices. IMF Chief Economist Pierre-Olivier Gourinchas advised that monetary policy should remain focused on bringing down inflation, and central banks should not halt their fight against inflation because of financial stability risks, which look "very much contained."

The IMF warned that the recent increase in financial market volatility had thickened the fog around the world economic outlook. Uncertainty is high and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled. The Fund cautioned that a severe flare-up of financial system turmoil could slash output to near recessionary levels. The IMF and the World Bank launched their spring meetings in Washington amid the fragile global economic outlook.

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