Global growth should hit 3.5 percent of gross domestic product this year and the next, but leaders need to address several financial vulnerabilities, the International Monetary Fund said Wednesday ahead of a G20 meeting.
"Financial vulnerabilities present an immediate concern," Christine Lagarde, the IMF's managing director, said in a blog post on Wednesday.
"After a long period of favorable financial conditions, including low-interest rates and easier access to credit, corporate leverage in many emerging economies is too high. In Europe, bank balance sheets still need repair following the crisis. In China, a faster-than-projected expansion — if it continues to be fueled by rapid credit and increased spending — would potentially lead to unsustainable public and private debt in the future," she pointed out.
Though the fund recognizes that short-term risks have slowed down, there are downside risks that cloud the prospects in the medium term. One of the risks is policy uncertainty, namely in the U.S., where the administration promised to reduce taxes and boost infrastructure spending, the Fund pointed out in its Global Prospects report on Wednesday.
The Fund also pointed to other long-term problems. "Think of excessively high economic inequality, low productivity growth, population aging, and gender gaps. As our research shows, these challenges put a ceiling on potential growth, making it harder to raise incomes and living standards," Lagarde also said on Wednesday.
As a result, the IMF urged G20 leaders meeting this Friday and Saturday in Germany to boost their banking systems and improve regulation, not unwinding measures. In the U.S. there are ongoing efforts to repeal of Dodd Frank financial regulations, introduced after the financial crisis.
Also, "both surplus and deficit countries should confront this problem (of account imbalances) now to avoid larger corrections down the road," Lagarde added.