IMF warns G-20 that world economy 'highly vulnerable'

WASHINGTON — The International Monetary Fund (IMF) warned Wednesday that the world economy is "highly vulnerable" and called for new mechanisms to protect the most vulnerable countries.

In a report on economic challenges ahead of the Shanghai meeting of finance chiefs of the powerful Group of 20 (G-20) economies, the global crisis lender said world growth had slowed and could be derailed by market turbulence, the oil price crash and geopolitical conflicts.

"The global recovery has weakened further amid increasing financial turbulence and falling asset prices," the IMF said.

"Strong policy responses both at national and multilateral levels are needed to contain risks and propel the global economy to a more prosperous path," it added.

The report, to be presented to the finance ministers and central bank chiefs of the G-20 leading economies meeting in Shanghai on Friday and Saturday, said the fund expects to lower its forecast for world growth in 2016, barely six weeks after making its most recent estimate of 3.4 per cent.

"Global activity has slowed unexpectedly at the end of 2015, and it has weakened further in early 2016 amid falling asset prices," the report said.

How countries should react to the threats will be the main agenda in the Shanghai talks. The IMF is urging countries to boost fiscal stimulus and to push through reforms in order to increase demand.

It added that central banks, including the US Federal Reserve, need to keep monetary policy accommodative to be sure tighter financial conditions do not stifle growth momentum.

However, the fund stressed, "to avoid over-reliance on monetary policy, near-term fiscal policy should support the recovery where appropriate and provided there is fiscal space, focusing on investment".

Besides the shocks to the world economy from China's slowdown and the crash in commodity prices, the IMF said geopolitical issues like the Syrian refugee crisis and the rising infections in Latin America from the Zika virus pose economic threats.

For countries shouldering the biggest burden of those crises, and countries otherwise fit but left vulnerable by the commodities downturn, the IMF said the world's financial safety net, which includes the fund's own programmes, could be enhanced.

Without any specifics, it called for new financing mechanisms to help countries in financial turmoil.

"Many countries at the centre of such shocks are shouldering a burden for others, with often limited capacity and fiscal space," the report said.

"Recognising the global public good nature of their actions, they could be backed up by a coordinated worldwide initiative to provide financial support," it added.

The IMF continued that uncertainty over Britain's future in the European Union (EU) risks negatively affecting the country's growth outlook.

Britain's economy was set to grow by 2.2 per cent this year and next, matching official gross domestic product for 2015, it remarked.

But it warned that "uncertainty associated with the outcome of the forthcoming referendum on EU membership could also weigh on the outlook" along with various other factors including "potential shocks to global growth and asset prices".

As Britain prepares for a June 23 referendum on its EU future, British Prime Minister David Cameron has warned that the country's departure from the European Union would threaten its economic and national security.

But London Mayor and Conservative rival Boris Johnson has dealt a blow by backing a "Brexit" despite Cameron winning a deal on EU reforms.

"Quantifying how a decision to leave the EU would affect the economy is difficult, given that the terms of staying in the EU are still being negotiated and the nature of post-exit relations with the EU are unknown," the IMF said in its latest outlook for Britain. 

"However, analysts have raised concerns that the exit debate could bring a period of uncertainty that could weigh on investment," it added.

Almost 200 bosses of top British companies on Tuesday urged voters to keep Britain in the EU, warning that an exit from the 28-nation bloc would threaten jobs.

Some 198 business leaders including Roger Carr, chairman of BAE Systems, BP Chief Executive Bob Dudley and Ron Dennis, chief of F1 team McLaren, wrote a joint letter published in The Times newspaper, backing Cameron's deal to reform the EU.