WASHINGTON—Expectations for an economic recovery and continued government aid are fueling overconfidence among investors, the International Monetary Fund said Wednesday, raising the risk of a sudden drop in asset prices that could threaten financial stability.
“With investors betting on persistent policy backstop, a sense of complacency appears to be permeating markets,” Tobias Adrian, head of the Monetary and Capital Markets Department, and his deputy, Fabio Natalucci, wrote in a blog post. “Coupled with apparent uniform investor views, this raises the risk of a market correction or repricing.”
Even so, governments should continue to provide fiscal and monetary support until a sustainable recovery takes hold, they said. “Reducing or withdrawing support at this stage could jeopardize the global economic recovery.”
The blog post accompanied an update to the fund’s semiannual Global Financial Stability Report released on Wednesday.
Delays in vaccinations, especially in emerging market economies that account for about 65% of global growth, could lead to a tightening in financial conditions and a rise in financial vulnerabilities that have been held in check so far, they said. Those include rising corporate and government debt levels and declining profitability in some banking systems.
“Delayed access to comprehensive health care solutions could mean an incomplete global recovery and endanger the global financial system,” the report said. “Because growth is a crucial ingredient for financial stability, an uneven and partial recovery risks jeopardizing the health of the financial system.”
As a result, policy makers face a dilemma. “While there is for now no alternative to continued monetary support, there are legitimate concerns around excessive risk-taking and market exuberance,” Messrs. Adrian and Natalucci wrote. One response would be to strengthen oversight of financial institutions to prevent risks from building further.
Wednesday’s report comes after the IMF said Tuesday the world economy is gearing up for a strong recovery from the pandemic in 2021, after shrinking considerably less than initially feared last year—though it warned that the outlook is subject to exceptional uncertainty.
Global output is projected to grow 5.5% this year, upgraded from the IMF’s October forecast for a 5.2% increase. Last year’s estimated contraction of 3.5% was smaller than October’s forecast for a 4.4% contraction.
Write to Andrew Ackerman at [email protected]
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