The International Monetary Fund (IMF) has warned that excessively loose monetary policy could be the trigger for further credit bubbles that risk setting off a fresh global financial crisis.
In its latest ‘Global Financial Stability’ report, the fund called for further policy reforms to restore long-term health to the financial system, which were urgently needed before the long-term dangers of monetary stimulus took hold.
Without such action “the global financial crisis could morph into a more chronic phase, marked by a deterioration of financial conditions and recurring bouts of financial instability”. However, the IMF is more optimistic about financial stability prospects in the short term and said that global financial and market conditions had “improved appreciably” since its previous report last October.
The IMF also said that it now expects global economic growth of 3.3% this year against its earlier forecast, in January, of 3.5%. It maintained its prediction that the growth rate will pick up in 2014 to 4%.
It added that the world economy is running at three speeds, with emerging markets and developing economies still strong but a gap emerging between growth in the US and in the eurozone.
Olivier Blanchard, the IMF’s commented: “The world economy is as weak as its weakest link. Given the strong interconnections between countries, an uneven recovery is also a dangerous one. Some tail risks have decreased, but it is not time for policy makers to relax.”
In its twice-yearly ‘World Economic Outlook’ report, the IMF reduced its forecast for the US economy, the world’s largest, which it now expects to expand by 1.9% this year, a reduction from its January estimate of 2.1% and last year’s US growth of 2.2%. However, it also commented that the US economy is improving and should growth by 3% in 2014 on the back of an improving job market, a recovering housing market and greater readiness by banks are more willing to lend.
Although China recently reported that its annual rate of economic growth eased to 7.7% in Q113, the fund expects the world’s second-largest economy to achieve 8% growth in 2013, improving to 8.2% in 2014. Although better than 2012, both figures would represent a slowdown from the double-digit annual growth regularly achieved by China until fairly recently.
The IMF expects contraction for the 17-country eurozone, which it thinks will shrink by 0.3% in 2013 but edge back into growth of 1.1% next year. The organisation downgraded the UK’s growth outlook by 0.3 percentage points in 2013 and 2014 and now forecasts expansion of 0.7% this year and 1.5% next. It also renewed its call for the UK coalition government and chancellor George Osborne to ease the strict austerity policy that it has pursued since taking office three years ago.
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