The global economy is strengthening but the International Monetary Fund warned on Wednesday that leaders of the Group of 20 must take action to deal with risks that remain a threat to growth.
Ahead of the G20 leaders summit this weekend in Hamburg, IMF Managing Director Christine Lagarde said the mood is upbeat given the now one-year-old recovery.
However, “it should be cautious optimism that prevails -- policy efforts are still needed to strengthen the recovery and build more inclusive economies,” Lagarde said in a blog post.
In her comments on the report the IMF prepared for the G20, Lagarde urged action to address issues such as high corporate debt in emerging market economies, especially China, low productivity growth, and US policy uncertainty.
Constellation of concerns
“Left alone, this constellation of concerns could be a recipe for sudden financial distress, when the world’s economies also continue to struggle with several longer-term problems,” she said.
Adding to concerns about aging populations and growing economic inequality, these “challenges put a ceiling on potential growth, making it harder to raise incomes and living standards.”
The IMF “Surveillance Note” said while the risks to the global economy in the short term are more balanced, “downside risks still dominate in the medium term.”
“There is no time for standing still,” the IMF said. “Policymakers will have to take tangible policy action to strengthen and sustain the recovery while ensuring that it is resilient, well-balanced, and more inclusive.”
The comments echo themes raised frequently in the fund’s regular World Economic Outlook report, including the most recent quarterly update in April, which flagged the risk posed by policy uncertainty in the United States and elsewhere.
“Despite a drop in election-related risks, policy uncertainty remains at a high level and could well rise further, reflecting -- for example -- difficult-to-predict US regulatory and fiscal policies, negotiations of post-Brexit arrangements, or geopolitical risks,” the IMF warned.
“This could harm confidence, deter private investment, and weaken growth.”
In fact, the IMF recently cut its growth forecast for the United States on the absence of expected spending measures that had been expected to boost growth.
Meanwhile, failure by China to deal with risks from excess credit growth “could result in an unwanted, abrupt growth slowdown, with adverse spillovers to other countries.”
Likewise, joint policy actions are needed to reduce current account deficits in countries like the United States and UK through “growth-friendly” budget adjustments, and to reduce the surpluses in countries like Germany by boosting investment and encouraging spending.
“A more expansionary fiscal stance in Germany would not only allow a much-needed increase in public investment and raise potential output -- it would also support external adjustment, while at the same time having positive spillovers to other euro area economies where there is still cyclical slack,” the report said.