IMF tells G20 fragile global economy needs urgent policy response

26 Feb 16

The global economy’s recovery is at higher risk of being derailed ramping up the need for a broad-based and balanced policy response, the International Monetary Fund has warned.

In a note to be prepared for G20 finance ministers and central bank governors at their meeting in Shanghai, China today and tomorrow, the IMF will call for measures to strengthen growth and contain risks.

The note highlights that the global recovery has weakened over the last year and risks being derailed just when the world economy is particularly vulnerable to adverse shocks.

“The fragile conjuncture increases the urgency of a broad-based policy response that strengthens growth and manages vulnerabilities,” the IMF stated.

Amid increasing financial turbulence and sharp drops in the price of risky assets in particular, the IMF said the likelihood of a further weakening outlook is increasing.

Growth is already under the baseline in advanced economies, while low demand in some countries and weakening of growth potential hold back the recovery further.

Adding to these headwinds are concerns about the impact of China’s economic rebalancing, along with signs of distress in other emerging markets, due to plummeting commodity prices, the IMF said.

At the same time, heightened risk aversion has triggered global equity market declines and brought more restrictive external conditions for emerging economies. The IMF warned that domestic vulnerabilities could further increase emerging market stress. Advanced economies too have tighter financial conditions due to falls in asset prices.

The IMF said the decline in oil prices could further destabilise the outlook for oil exporters and the impact on importers generates less demand support than expected, lowering global growth and exacerbating the current low-inflation environment.

Finally, the IMF warned that non-economic shocks – wars, terrorism, refugees and global epidemics – loom over some countries and regions and could have significant spillover effects on global economic activity “if left unchecked”.

The IMF called for a strong and broad policy response as well as “bold multilateral actions” to meet these challenges.

This should include measures to strengthen growth. In advanced economies this means a mix of “mutually-reinforcing demand and supply policies”.

Accommodative monetary policy “remains essential” where inflation is below target, but, where there is fiscal space to do so, investment that boosts both the demand and supply potential is needed to reduce over-reliance on monetary policy, the IMF said.

This echoes calls from the OECD earlier this month for its members for a “stronger collective policy response”, that moves away from austerity towards a more balanced, pro-growth strategy.

Globally, the IMF said the international policy response should be closely coordinated, the global financial safety net and oversight needs to be enhanced and spillovers from non-economic shocks should be ring-fenced.

“Countries at the centre of the current refugee crises and epidemics are shouldering a burden ... and could be backed up by a coordinated global initiative,” the note said. This required those at risk from spillovers to contribute financial support and global agencies, including the fund itself, to reassess how they can best channel resources to where they are most needed.

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