IMF upbeat on global financial stability

Despite political and policy uncertainty in the United States and Europe and rising debt levels in China, global financial stability has continued to improve according to the latest report from the International Monetary Fund (IMF).

The IMF’s more upbeat prognosis follows its forecast earlier this week of a stronger world economic outlook, although it also warns of risks ahead.

The improvement is due in part to many governments in developed economies easing up on their austerity measures after a period of budget cuts in the wake of the 2008 global financial crisis.

“Advanced economies eased their fiscal stance by one-fifth of 1% of gross domestic product (GDP) in 2016, breaking a five-year trend of gradual fiscal consolidation,” the report notes. “Their aggregate fiscal stance is expected to remain broadly neutral in 2017 as well as in the following years.

“Fiscal policy is generally seen as a powerful tool for promoting inclusive growth and can contribute to stabilising the economy, particularly during deep recessions and when monetary policy has become less effective.

“At the same time, high debt levels, long-term demographic challenges, and elevated fiscal risks place a premium on sound public financial management. In particular, policies should be anchored within a credible medium-term framework that ensures debt sustainability, manages risks adequately, and encourages countries to build buffers during upturns.”

A rise in long-term interest rates in a number of countries, including the US, has lifted the earnings of banks and insurance companies. At the same time, a recovery in the price of commodities such as oil has improved the economic fortunes of many emerging markets and helped banks in those countries strengthen their financial stability.

Despite the more positive tone overall, the report contains a number of caveats. The IMF is concerned that many governments remain heavily indebted and need to be careful with their budgets. It recommends that the US, still the world’s largest economy, takes the opportunity provided by stronger economic growth to get its finances under control.

“In the United States, where the economy is close to full employment, fiscal consolidation could start next year to put debt firmly on a downward path,” the report comments, while noting that president Trump has pledged to ramp up spending on infrastructure and defence while cutting taxes.

“These policies are expected to generate rising deficits over the medium term. As a result, the US debt ratio is projected to increase continuously over the five-year forecast horizon,” the IMF warns.

The report also expresses concerns over the prospect of the US adopting more protectionist trade policies and the likelihood of retaliatory measures. It warns that businesses in emerging economies that are closely integrated into global trade and capital markets could face lower foreign revenues and higher borrowing costs.

Other areas of concern include rising debt levels in China, which this week reported stronger economic growth in the first quarter of 2017, which was due in part to a faster expansion of credit.

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