The world is sleepwalking into a fresh crisis as investors start to lose faith in policymakers’ ability to revive the global economy, according to the International Monetary Fund.
In its bluntest warning to date on the costs of policy inaction, the IMF said “financial and economic stagnation” could take hold unless governments prevented a “pernicious feedback loop of fragile confidence, weaker growth, low inflation and rising debt burdens” from forming.
José Viñals, the head of the IMF’s financial stability division, said a prolonged slowdown could knock around 4pc off global output relative to current expectations over the next five years amid repeated bouts of market turmoil.
Mr Viñals said a $1.3 trillion (£912bn) corporate debt timebomb in China also posed “potentially serious challenges” to financial stability if defaults pushed banks over the edge.
The IMF’s global financial stability report said a “loss of market confidence” would drag global bourses into a bear market.
Under this scenario, Stocks in the UK, US, eurozone and China would lose a fifth of their value over two years, it estimated.
The triple threat of slower growth, rising risks from China and diminished faith in policymakers’ ability to prevent a fresh downturn meant households and businesses were likely to save more and spend less in the uncertain global environment.
Economic powerhouses such as China and India would see output losses of more than 4pc by 2021 compared with current IMF forecasts, it said, while world output world be 3.9pc lower relative to the baseline.
Rising stress in China
The IMF said there were signs of “widespread and rising corporate stress” among Chinese corporates that were taking longer to pay their bills and struggling to roll over existing debt.
It estimated that around 15.5pc of total commercial bank loans to the corporate sector – worth around $1.3 trillion – were “at risk” of default because companies did not earn enough income to afford interest payments.
Potential bank losses on these loans could be as high as $756bn – or 7pc of China’s GDP. The IMF described this as “substantial”.
Full article: World faces ‘lost year’ as policymakers sleepwalk towards fresh crisis, warns IMF (The Telegraph)