The Fund noted that risks to the global growth forecast appeared broadly balanced in the near term, but remain skewed to the downside over the medium term.
“On the upside, the cyclical rebound could prove stronger in the near term as the pickup in activity and easier financial conditions reinforce each other. On the downside, rich asset valuations and very compressed term premiums raise the possibility of a financial market correction, which could dampen growth and confidence,” the report said.
A possible trigger for a market correction was, the Fund said, a faster-than-expected increase in advanced economy core inflation and interest rates as demand accelerates.
“If global sentiment remains strong and inflation muted, then financial conditions could remain loose into the medium term, leading to a build-up of financial vulnerabilities in advanced and emerging market economies alike. Inward-looking policies, geopolitical tensions, and political uncertainty in some countries also pose downside risks.”
The report comes as world leaders and business heads convene at the World Economic Forum. The annual meeting aims to “improve the state of the world” and encourage joint action to solve some of the world’s biggest problems, such as climate change and poverty.
The IMF encouraged a shared endeavour among economies to make reforms, saying on Monday that the current cyclical upswing provided a good opportunity to do so.
“Shared priorities across all economies include implementing structural reforms to boost potential output and making growth more inclusive. In an environment of financial market optimism, ensuring financial resilience is imperative.
“Weak inflation suggests that slack remains in many advanced economies and monetary policy should continue to remain accommodative. However, the improved growth momentum means that fiscal policy should increasingly be designed with an eye on medium-term goals — ensuring fiscal sustainability and bolstering potential output. Multilateral cooperation remains vital for securing the global recovery.”
