Major financial institutions may be powerless to prevent the next global economic downturn from tuning into a full-blow recession, the International Monetary Fund has warned.
In a speech on the future of the eurozone, the IMF’s deputy director David Lipton, warned of the depleted power of central banks and governments to combat another sharp economic shock.
“The bottom line is this: the tools used to confront the global financial crisis may not be available or may not be as potent next time” he said.
A programme of quantative easing introduced by central banks in the wake of the 2008 financial crisis pumped huge amounts of cash into economies to offset the impact of the credit crunch and keep major financial institutions and businesses afloat.
However, the Daily Telegraph reports that “these efforts were so vast, and the recovery of economies so weak in the decade since the crisis, that central banks’ balance sheets have swollen to a level that leaves little room left for manoeuvre”.
“Following various bailouts and slow recoveries many governments still have large debt piles, reducing the fiscal firepower available to counteract recessions” the paper adds.
Lipton warned there may also be “political resistance” to more bailouts because of accusations that the burden of the last recession fell unevenly on society.
The warning follows increasing concern the global economy is slowing down.
Weakening growth from China combined with a global trade war instigated by Donald Trump, sluggish eurozone growth and the fear of sudden economic shocks such as a no-deal Brexit have pushed investor confidence down.
Added to that is the fear that the US economy, still the world’s largest, is on the cusp of overheating.
Its current economic expansion will hit a decade in June of this year – matching the longest on record – and “while the economy could keep on growing, just the length of the current expansion means a recession or at least a slow down of the economy should appear sooner rather than later”, says Forbes.
Reuters reports that “concerns about the health of the world economy heightened last week after cautious remarks by the US Federal Reserve sent 10-year treasury yields to the lowest since early 2018”.
Historically, yield curve inversions have often preceded recessions, most recently in 2007 before the global financial crisis.
All this means that amid rising debt and a worldwide monetary tightening, “a mounting weight of evidence suggests the world is one shock away from a contractionary vortex that would be extremely hard to control”, says Ambrose Evans-Pritchard in the Daily Telegraph.