IMF warns global recession 'may be closer than we think'

The biggest risk to the world economy is complacency, the International Monetary Fund warned at Davos. Picture / AP

A global recession "may be closer than we think" and the biggest risk to the world economy is complacency, the International Monetary Fund has warned at Davos.

Maurice Obstfeld, of the International Monetary Fund (IMF), said developed economies should brace themselves for an era of lower growth, with long-term prospects of around 1.5 per cent a year.

The IMF's downbeat tone came despite the think tank upgrading forecasts for global growth to 3.9 per cent for this year and next.

The short-term upgrade was in part prompted by US President Donald Trump's US tax cuts, which the think tank believes will boost both US and global economies for the "next few years".

However, it revised its forecast for UK growth next year to 1.5 per cent, down from 1.6 per cent previously. Germany by contrast had its predicted growth raised to 2 per cent, from 1.5 per cent, while the US is expected to grow 2.5 per cent next year.

On the eve of the World Economic Forum, Obstfeld urged politicians and regulators to take action to prepare for another crash: "Now is the time to build policy buffers, reinforce defences against financial instability, and invest in structural reforms, productive infrastructure, and people.

"The next recession may be closer than we think, and the ammunition with which to combat it is much more limited than a decade ago, notably because public debts are so much higher."

Christine Lagarde, the IMF's managing director, also pointed to a "troubling" increase in debt levels across many countries and warned policymakers against complacency, saying now was the time to address structural deficiencies in their economies.

Obstfeld said America's trading partners were also likely beneficiaries of Trump's tax reforms. But he warned the boon would be "short-lived" and would lead to a wider US current account deficit and stronger US dollar, which in turn would hit international investment flows.

Developed economies are projected to grow 2.3 per cent this year, but must get used to subdued growth longer term of "only about two thirds as high" - or around 1.5 per cent a year.

This was because ageing populations and lower productivity growth would hamper expansion and had to be countered with greater investment, he argued.

Obstfeld also cautioned that a swing to more "nationalistic and authoritarian" governments in some advanced economies could "harm longer-term growth prospects" and this would hit the poorest hardest.

In response to the downgrade for the UK economy, a UK Treasury spokesman said: "We are building a Britain that is fit for the future by improving skills, backing innovation and investing in infrastructure to deliver a stronger economy and guarantee a better future for the next generation."

The former Conservative Treasury minister Lord O'Neill made a more positive prediction for the UK economy.

He told the BBC any possible negative impact from Brexit was likely to be "dwarfed" by the positive impact from accelerating growth in China, the US and continental Europe.