In its bluntest warning to date on the costs of policy inaction, the IMF said “financial and economic stagnation” could take hold unless governments prevented a “pernicious feedback loop of fragile confidence, weaker growth, low inflation and rising debt burdens” from forming, reports The Telegraph.
José Viñals, the head of the IMF’s financial stability division, said a prolonged slowdown could knock around 4pc off global output relative to current expectations over the next five years amid repeated bouts of market turmoil.
Mr Viñals said a $1.3 trillion (£912bn) corporate debt timebomb in China also posed “potentially serious challenges” to financial stability if defaults pushed banks over the edge.
The IMF’s global financial stability report said a “loss of market confidence” would drag global bourses into a bear market.
Under this scenario, Stocks in the UK, US, eurozone and China would lose a fifth of their value over two years, it estimated.
The triple threat of slower growth, rising risks from China and diminished faith in policymakers’ ability to prevent a fresh downturn meant households and businesses were likely to save more and spend less in the uncertain global environment.
Economic powerhouses such as China and India would see output losses of more than 4pc by 2021 compared with current IMF forecasts, it said, while world output world be 3.9pc lower relative to the baseline.
“This would be roughly equivalent to foregoing one year of global growth, said Mr Viñals.
Low inflation and nominal growth would also push debt burdens in struggling countries such as Greece and Japan to fresh highs.
This would “entrench secular stagnation worldwide” the IMF warned.
Mr Viñals called for a “more balanced and potent policy mix for improving the growth and inflation outlook”.
He urged policymakers in the eurozone to help banks deal with an “elevated” number of so-called non-performing loans – where debtors are usually three months behind on payments.
In China, the IMF called for an end to implicit subsides that allowed zombie companies to remain in business. It also said Beijing should equip regulators with the tools needed to police China’s increasingly complex financial system.
“Much is at stake. Additional measures are needed to deliver a more balanced and potent policy mix. If not, market turmoil may recur and intensify, said Mr Viñals.
“Monetary policy was becoming “overburdened”, the IMF said. Growth-friendly fiscal policies and wider reform would be needed to support the recovery and boost investment and consumption.
Doing this would lead to a “successful normalisation”, where a rebound in economic risk taking and confidence encourages spending and “accelerates smooth exits” from the extended period of record low interest rates.
“Monetary policy remains crucial but cannot be the only game in town,” said Mr Viñals.