The waters have not yet calmed after the collapses of Silicon Valley Bank and Signature in the U.S. and Credit Suisse in Europe, with shaky bank stocks including First Republic and Germany’s Deutsche Bank still making investors nervous. Banking woes are the latest sign that the global financial system’s transition from loose monetary policy and near-zero interest rates to a high-rate environment comes with an adjustment period, but in the near-to-medium term, those growing pains translate to higher risks of even bigger economic calamities.

“[T]he outlook for the global economy over the medium term is likely to remain weak,” Georgieva said in a speech Sunday at the China Development Forum in Beijing. “[T]he rapid transition from a prolonged period of low interest rates to much higher rates—necessary to fight inflation—inevitably generates stresses and vulnerabilities, as evidenced by recent developments in the banking sector in some advanced economies.”

“It is also clear that risks to financial stability have increased,” she said of the potential impact of the banking crisis on the global economy.

Georgieva referenced the IMF’s revised economic outlook for 2023, which in January forecast the global economy to grow 2.9% this year, slightly higher than the 2.7% previously predicted in October. The report predicts the global economy to pick up speed slightly in 2024, growing 3.1%, but Georgieva warned that for the next two years at least, “global growth will remain well below its historic average of 3.8%.”

But slowing growth might be the best-case scenario for the global economy, as the banking crisis is just one of several factors threatening to upend financial stability around the world.

“Policymakers have acted decisively in response to financial stability risks,” Georgieva said, but added: “Uncertainty is high, which underscores the need for vigilance” as economic pressures pile up.

Global threats

Ongoing pandemic recovery efforts and the consequences of the Ukraine war are expected to continue weighing on the global economy this year, Georgieva said, but the biggest threat may be the careful balancing act being performed by central banks worldwide, trying to reduce inflation without bringing their economies grinding to a halt.

Georgieva praised governments for how they stepped in to soften the blow of a banking crisis this month, but added that the bank troubles highlight just how difficult the job is for central banks.

Banks like SVB benefited from years of low interest rates, which favored investing in long-term bonds that would have taken years to mature, but the abrupt shift in monetary policy over the past year, headlined by the Federal Reserve, suddenly made those investments look a lot more like liabilities than assets. What followed was a classic bank run that had more to do with psychology than the Fed’s monetary policy, but the collapse has raised questions as to whether further interest rate hikes are worth it considering other banks may have similar holdings, and if the Fed’s commitment to reducing inflation is doing more harm than good.

There have been no more major bank failures since Credit Suisse was absorbed by domestic rival UBS in a government-brokered deal earlier this month, and a few imperiled institutions are showing promising signs of life this week. Shares at First Republic, which plunged by 50% early last week, were up more than 30% when trading opened on Monday. And Deutsche Bank’s stock, which suffered a brutal rout Friday, was up around 5% Monday as analysts reassured investors over the bank’s financial stability. 

But central bank officials are still aware of the risk and have acknowledged that the banking crisis has created more uncertainties, especially as the failures set the stage for a stricter lending environment. 

“These kinds of events increase uncertainty, and we must take that into consideration,” Luis de Guindos, vice president of the European Central Bank, said of global bank challenges in an interview with Business Post Sunday. “Our impression is that they will lead to an additional tightening of credit standards in the euro area. And perhaps this will feed through to the economy in terms of lower growth and lower inflation.”

In her speech in Beijing, Georgieva did note some positive “green shoots” for the global economy, including improved expectations of economic growth in China after the country began loosening COVID-19 restrictions late last year. “The robust rebound means China is set to account for around one-third of global growth in 2023—giving a welcome lift to the world economy,” she said.

China’s reopening was a leading reason behind the IMF’s improved economic growth forecast in January, but despite potential tail winds to the global economy this year, the banking crisis has underscored that financial stability remains precarious as long as central banks continue their efforts to reduce inflation. Georgieva warned governments worldwide to continue keeping a close eye on how their economies hold up against a more uncertain environment.