The IMF says the global economy is facing growing threats and financial markets need to act now to head off the growing risk of a major downturn, the Fund’s Financial Counselor and Monetary and Capital Markets Director Tobias Adrian said at the launch of the Global Financial Stability Report (GFSR) Wednesday in Washington.
“After years of economic expansion, global growth is slowing, sparking concerns about a deeper downturn. The credit cycle is maturing, financial vulnerabilities continue to build in many countries and could amplify a slowdown,” said Adrian.
Adrian outlined a series of challenges around the world.
“In advanced economies, corporate debt and financial risk-taking have increased. The creditworthiness of borrowers has deteriorated. So-called leveraged loans to highly indebted borrowers continue to be of particular concern.”
“In the euro area, fiscal challenges remain in countries that have worries about the sovereign financial sector nexus. If sovereign yields were to rise sharply banks with large holdings of government debts could face significant losses. Insurance companies could also face losses on their bond portfolios,” he added.
Chinese authorities are working to balance sometimes conflicting needs, he said.
“In China, authorities face a difficult trade-off between supporting growth in the face of external shocks and containing leverage through regulatory tightening.”
Particularly of interest is the level of housing prices and vulnerabilities surrounding mortgages and lending risk in some markets.
The GFSR finds that lower house price momentum, overvaluation, excessive credit growth, and tighter financial conditions predict heightened downside risks to house prices up to three years ahead. The measure of house prices at risk helps forecast downside risks to GDP growth and adds to early-warning models for financial crises.
“What we find is that in close to 30 percent of both advanced and emerging markets, house prices are at risk at a similar magnitude as what we saw in 2007 prior to the financial crisis in the U.S. So there is an increased level of housing at risk in many countries.”
A copy of the full report is available at IMF.org/GFSR.