IMF, US Disagree Over Global Recession Induced By Financial Crisis

The International Monetary Fund (IMF) has stated that the financial crisis in the global banking sector is increasing the possibility of global recession, but the US says otherwise on Tuesday, 11 April 2023.

Although the IMF said the possibility of a recession is one in seven, the experts of the global financial body didn’t rule it out. 

The collapse of Silicon Valley Bank (SVB) and Signature Bank contributed to the fear that the financial sector could drag the global economy down with it.

Although the Central Bank of Nigeria (CBN) and the Bank of England have both assured that the bank failures recorded in the United States will not spill over to Nigeria and the UK, but fear of global contagion remains. 

The financial counsellor at the IMF, Tobias Adrian, said trust in the financial system could be eroded, resulting in the withdrawal of funds from banks. 

“Stresses could then re-emerge in the financial system. Trust – the foundation of finance – could continue to erode. 

“Funding could disappear rapidly for banks and non-banks, and fears could spread, amplified by social media and private chat groups,” Adrian said. 

His colleague, an economic counsellor at the IMF, Pierre-Olivier Gourinchas, said global Gross Domestic Product (GDP) to per capita could drop, stating that downside risks dominate the financial sector. 

“In such a severe downside scenario, global GDP per capita could come close to falling – an outcome whose probability we estimate at about 15pc,” Gourinchas said. 

He added that: “The financial system may well be tested again. Once again, downside risks dominate. Nervous investors often look for the next weakest link, as they did with Credit Suisse.” 

Meanwhile, the US Treasury Secretary, Janet Yellen, has warned that the talk of recession shouldn’t be overblown, as the hope of avoiding a downturn is still present. 

“I wouldn’t overdo the negativism about the global economy,” she said. Yellen said there’s a possibility of a credit squeeze arising, but the failure of Silicon Valley Bank and Signature Bank hasn’t necessarily led to it yet.