World economy 'highly vulnerable', IMF warns G20

The International Monetary Fund (IMF) has warned 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 economies, the global crisis lender yesterday 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 G20 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%.

"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 to growth 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 said 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 programs – 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.