FX.co ★ IMF warns of approaching global economic crisis

According to David Lipton, First Deputy Managing Director of the International Monetary Fund (pictured), the world economy is teetering on the edge of a yet another crisis. Thus, he urges all nations to get ready for possible consequences. The board of governors of the IFM agrees with him saying that the countries worldwide should lower tax burdens, keep exchange rate flexibility, and take into account low prices on global markets in their draft budgets.

Risks have increased amid capital outflows from financial markets and low commodity prices creating fresh concerns about the health of the global economy, the IMF said.

Mr. Lipton claims that monetary authorities in developed and emerging countries have become more hesitant.

In the US, aging-related spending pressures and unfulfilled infrastructure needs diminish economic prospects. In Japan, deflation is putting the recovery at risk. In Europe, sovereign and private sector balance sheets remain highly leveraged and there is a high level of banks' non-performing loans.

At the same time, new risks are emerging. And the global economic slowdown is the biggest one. It is affecting bank balance sheets triggering a considerable tightening of financing conditions. Meanwhile, there is excess capacity in emerging markets that results in sharp declines in capital spending.

In 2016 equity price indices have declined over 6%, implying a loss of global market capitalization of over $6 trillion or 8.5% of global GDP. Some Asian markets, such as China and Japan, have been particularly hard hit, with losses of over 20% of market capitalization since the start of the year.

Emerging market currencies have weakened as their sovereign credit spreads have widened. Thus, in Latin America and Africa they rose by over 300 basis points during the past year.

Mr. Lipton also highlights sharp contraction in global capital and trade flows. Last year, emerging markets witnessed about $200 billion in net capital outflows. Weak export and import growth in China, Russia and Brazil is said to be the reason of declines in trade flows.

Inflation has reached historical lows. Last year, inflation in advanced economies was at 0.3%, the lowest since the financial crisis.

Pictured: Christine Lagarde