The Strategist

IMF, World Bank warn of global recession

10/21/2019 - 09:25

Fears of a new recession were quite noticeable in the official agenda of the negotiations of Heads of financial departments of the G20 countries. This was the subject of the two-day meeting held in Washington at the session of the International Monetary Fund and the World Bank. In a communiqué following the meeting, participants said that they would take all measures to support growth, financial stability and limit risks, including fiscal policy instruments. The statement also promises not to manipulate exchange rates and indicates that “free and fair conditions for world trade and investment” are key drivers of economic growth. However, the risks have only been growing both in developed and developing countries.

Friends of Europe
Friends of Europe
The governments of large countries should make more active use of fiscal policy instruments and at the same time tighten control over the risks of financial stability. This follows from the communiqué of the annual meeting of the International Monetary Fund (IMF) and the World Bank. In the financial stability report, IMF experts indicated that soft monetary policy encourages investors, especially insurance companies, pension funds and asset management funds, to seek higher returns by investing in more risky and less liquid securities. In particular, pension funds are now more active in investing in private equity and real estate. “The similarity of strategies - investing in the same asset classes - can increase sales in the market, and cross-border investments by life insurers can provoke negative consequences in different markets. Moreover, stocks in the US and Japanese stock markets already seem overvalued, and credit spreads, on the contrary, are too tight and do not reflect the fundamental indicators of borrowers,” the report says. This increases the risks of financial stability in the medium term, the IMF warned.

Regulators, meanwhile, are facing a dilemma. On the one hand, they must soften policies to support declining business activity, and on the other, avoid accumulating risks.

The IMF is urging stricter macroprudential supervision, including by extending it to large borrowers, and tightening control over institutional investors to control public debt.

The IMF is particularly worried by countries where rates are deep in the negative zone: the volume of government and corporate securities with negative returns in the world has already grown to a record $ 15 trillion. This reduces the cost of lending, but also creates additional risks, especially in the corporate sector. The IMF stress scenario (a half as much recession as during the 2008–2009 crisis) shows that the debt of companies that have difficulty servicing their liabilities may reach $ 19 trillion (40% of all corporate debt in the USA , China, Japan and European countries). Although in comparison with 2009, the debt burden increased markedly only in China (from 40% to 75% of GDP) and the United States (from 30% to 35% of GDP).