The IMF sees the global economy at a ‘delicate moment’ and financial markets need to act now to head off the growing risk of a major downturn, the Fund’s Financial Counselor Tobias Adrian says ahead of the launch of the Global Financial Stability Report (GFSR) Wednesday (April 10) in Washington.
“It is imperative for policy makers to act now to limit the buildup of financial vulnerabilities those vulnerabilities put growth at risk. Any adverse shock to the economy can get amplified,” said Adrian.
“We're at a delicate moment right now. It is important for policy makers to act. There is a danger that adverse shocks get amplified, putting growth at risk. The likelihood of seeing negative growth over the next two to three years is substantial,” he said.
“We worry particularly about the deterioration of underwriting standards in the corporate market. And we urge policymakers to take action to limit those vulnerabilities.”
Particularly of interest is the level of housing prices and vulnerabilities surrounding mortgages and lending risk in some markets.
The GFSR finds that lower house price momentum, overvaluation, excessive credit growth, and tighter financial conditions predict heightened downside risks to house prices up to three years ahead. The measure of house prices at risk helps forecast downside risks to GDP growth and adds to early-warning models for financial crises.
“We present a new tool to assess the degree to which house prices could decline over the next one or two years. We find that in the substantial fraction of both advanced and emerging markets house prices are at risk of falling substantially.”
Policymakers can use estimates of house prices at risk to complement other surveillance indicators of housing market vulnerabilities and guide macroprudential policy actions aimed at building buffers and reducing vulnerabilities.
“Crises and recessions that go hand-in-hand with housing market collapses tend to be more severe than the recessions where housing markets hold up. So policymakers have to act on mitigating those vulnerabilities in the housing sector,” he summed up.
A copy of the full report will be available at IMF.org/GFSR at 830 am ET Tuesday.