IMF – Global Financial Stability Report, October 2023

The October 2023 Global Financial Stability Report by the International Monetary Fund (IMF) highlights the possibility of a soft landing or abrupt awakening for the global economy. While central banks in advanced economies may need to maintain tighter monetary policy due to high and declining core inflation, emerging market economies have made progress in lowering inflation. However, there are discrepancies across regions, leading to a potential desynchronization of global monetary policy. Despite recent declines in equity prices, financial conditions for advanced economies have overall eased since the April 2023 report. Stock prices in Europe and the United States have increased by about 10 and 12 percent respectively this year, with corporate credit spreads remaining low. Japan has seen positive equity performance, supported by accommodative monetary policy and stronger corporate profits. Many emerging markets have also experienced equity price increases consistent with currency appreciation in the first half of the year. However, a shift in inflation outlook could challenge this narrative and lead to a sharp repricing of assets. Although acute stress in the global banking system has diminished, there are still weak banks in some countries. Other sectors may also show cracks that could become concerning fault lines. In the event of a sudden tightening of financial conditions, adverse feedback loops could be triggered and test the resilience of the global financial system. The global credit cycle has started turning as borrowers' debt repayment capacity decreases and credit growth slows. The IMF's growth-at-risk measure indicates that risks to global growth are skewed to the downside, similar to the assessment in April 2023. If a soft landing does not occur, investors may pull back from risk-taking, leading to tighter financial conditions and a more firmly downside-skewed growth distribution.