IMF cuts forecasts, warns of vulnerabilities to global financial system

New vulnerabilities have emerged in the global financial system and the resilience it has regained since the financial crisis has yet to be tested, the International Monetary Fund (IMF) has said.

In a new report the IMF said near-term risks to global financial stability have increased, but added that conditions were still broadly accommodative and supportive of growth in the near term.

However, it warned that risks could rise sharply should pressures in emerging-market economies mounted or if trade tensions continued to escalate.

“Medium-term risks remain elevated as easy financial conditions contribute to a further build up of financial vulnerabilities,” the IMF said.

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On Tuesday, it cut its growth forecast for the first time in over two years amid a warning that expansion in the world economy was plateauing. Ahead of its annual meeting in Bali, Indonesia, the fund projected a global expansion of 3.7 per cent this year and next, as against the 3.9 per cent projected three months ago. This is the first downgrade since July 2016.

While the global economy is still on track to match last year’s pace, which was the strongest since 2011, the latest outlook cautions that fatigue is setting in, and that the overall performance masks divergence, with mounting weakness in emerging markets from Brazil to Turkey.

In its new report, published on Wednesday, the IMF said over the past six months global financial conditions have marginally tightened, while the divergence between advanced and emerging market economies has grown.

“The global economic expansion continues, providing an opportunity to strengthen balance sheets and rebuild buffers, but growth appears to have peaked in some major economies,” it said.

Regulatory reform

“As clouds gather on the horizon it is crucial for countries around the world to complete and implement the global regulatory reform agenda and to resist the call to roll back reforms. To counteract rising vulnerabilities, macro- and microprudential policies should be developed and deployed as warranted.”

The IMF said to address potentially systemic risks, financial regulation and supervision should be used more proactively.

“Regulators and supervisors must remain attentive to new risks, including possible threats to financial stability stemming from cybersecurity, financial technology, and other institutions or activities outside the perimeter of prudential regulation.”

Over the longer term the IMF sees aging populations and sluggish productivity growth as a major challenge to advanced economies. Global growth would slow to 3.6 per cent by 2022-2023, as growth in rich nations fell back to potential. – (Additional reporting - Bloomberg)