Just a day after upgrading its global growth predictions for 2017 and 2017, the IMF warned on Wednesday that benign economic conditions were fueling an appetite for risk that, together with central banks’ response to the 2008 global crisis, appeared to be laying the ground for a new financial downfall.
Gainers were led by insurance, nonferrous metal and land transportation issues.
“While the waters seem calm, vulnerabilities are building under the surface [and] if left unattended, these could derail the global recovery,” said Tobias Adrian, of the IMF’s financial stability watchdog. The good times were breeding “complacency”, he said, that was “spawning financial excesses”.
If these trends continued, the IMF said in its latest Global Financial Stability Report, they could lead to a crisis that, were equity prices to tumble 15% and home prices to fall 9%, would cut 1.7% off global output.
Such a financial crash would be “broad-based and significant”, despite it being a third as severe as the 2008 global crisis, the IMF said. The US, where the Fed has halted quantitative easing and is further along the line of normalising its fiscal policy, will probably mitigate more of the damage, as opposed to Europe and emerging markets, which would see $100bn in capital outflows.
The IMF found that growing non-financial sector debt in G20 economies, which reach $135tn (or about 235% of aggregate annual) last year, gave reason to worry.
The US and China each accounted for about a third of the $80tn increase in debt since 2006, the IMF said.
The low interest rates that helped fuel the increase in leverage since the financial crisis had broadly made that debt relatively affordable to repay.
But in most G20 countries, companies and households had loaded up on so much debt that the debt service ratios — a measure of affordability — had increased, pointing to greater financial stress. Among the G20 countries where that issue is most acute are Australia, Canada and China, the IMF said.
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