Stagnating global economy outlook may turn into a downturn

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Last week the International Monetary Fund issued an “urgent” call for the world’s largest economies to roll out more policies to boost growth, painting a dark outlook for the global economy.

The IMF said central banks need to maintain their easy-money policies and the Group of 20 largest economies must prepare contingency plans should a stagnating outlook turn into a downturn.

“Policy makers should stand ready to act more aggressively should the impact of financial market turbulence and higher uncertainty threaten to materially weaken the global outlook,” the IMF said in a briefing written for the G-20 ahead of a group meeting of finance officials later this week in China.

“A coordinated use of fiscal space would be beneficial should the global outlook weaken materially,” the IMF said.

Some countries already have begun leveraging budgets to boost growth. Canada has become a poster child for the G-20, and the U.K.’s new government has signaled it may use state coffers to goose a shaky economy. China juiced its economy with fresh credit, but fund economists warn those efforts delay needed economic overhauls and come at a cost given the country’s high debt levels and overcapacity.

Earlier this week, the IMF downgraded its forecast for global growth and warned that the U.K.’s decision to leave the European Union and problems elsewhere around the world risked pushing the economy into a deeper rut.

The U.K. and Europe are likely to face pressure from other G-20 members to resolve their divorce expeditiously and in a way that averts further market turmoil.

The IMF warned that an “unnecessarily long period of political and economic uncertainty” surrounding Brexit and the deterioration of financial conditions in some European countries “could have severe macroeconomic repercussions.” Advanced economies would likely get hit hardest, “including through the intensification of bank distress in vulnerable economies.”

The fund said heightened uncertainty also exposes the world to unforeseen negative shocks translating into “global disruptions.”

Those risks are why the IMF is pushing the G-20 to ramp up efforts on all fronts.

Besides urging the G-20 to deliver on long-promised but half-delivered economic overhauls meant to boost productivity and using budgets to revive growth prospects, the fund said anemic growth means central banks should keep their feet on the cheap-cash accelerator.

“Central banks should continue to use all available instruments to raise inflation, including negative interest rates,” the fund said.

And even though the U.S. economy appears on the verge of taking off, the fund says the U.S. Federal Reserve should push back rate increases. “There is a clear case for the Fed to proceed along a very gradual upward path for the fed-funds rate, conscious of global dis-inflationary trends,” the IMF said.

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