The International Monetary Fund has warned of growing ‘dangerous undercurrents’ that threaten the world economy.
In its biannual Financial Stability Report, the IMF provided an in-depth look into markets and the banking sector a decade on from the Global Financial Crisis. Although the US-based organisation concluded banks are now safer than in 2008, governments should resist dismantling banking regulations put in place to stop a similar financial crash.
US President Donald Trump has already rolled back rules in America for small and medium-sized lenders in May, saying that red tape was preventing banks from lending to businesses.
In a separate report, the body revised down its economic forecasts for most countries for 2018 and 2019, which stemmed from weak data earlier this year in the Eurozone, UK and Latin America and downgraded global growth by 0.2 percentage points to 3.7 percent.
Maurice Obstfeld, IMF’s chief economist, said, ‘with geopolitical tensions also relevant in several regions, we judge that, even for the near future, the possibility of unpleasant surprises outweighs the likelihood of unforeseen good news.’
The fund said that rising inequality and intensified trade wars could ‘significantly harm global growth’, and that a ‘no-deal’ departure from the European Union for Britain could lead to a disruption in the flow of finance in European money markets.
The head of the IMF, Christine Lagarde, said she was concerned by the 60 percent increase in the total value of global debt since the financial crisis.
‘This should serve as a wake-up call,’ she said, as a build-up of debt by some emerging markets would make them more vulnerable to higher US interest rates. Recent increases by the Federal Reserve, America’s central bank, in an attempt to cool domestic inflationary pressure, may destabilise the likes of Turkey and Argentina as investment begins to flow out towards America as returns to capital are greater.
The IMF also noted that UK finances were at a historically weak point, with high levels of national debt and a low level of state-held assets. According to one report, out of leading industrialised countries, only Portugal’s net worth was in a poorer position than the UK’s and suggested that taxes may have to be raised to offset the lower level of revenue it was receiving from state-held assets.
It also urged the Bank of England to be ready to provide quantitative easing, the printing of money, in the event of a no-deal Brexit; adding that countries should focus on policies that would generate inclusive growth and wage increase, as despite record lows in unemployment, wage growth has been weak.