IMF warns rising vulnerabilities may heighten negative shocks

​​​​​​​By Ovunc Kutlu

ISTANBUL (AA) - Rising vulnerabilities could heighten negative shocks for the global economy, according to a report by the International Monetary Fund (IMF).

Shocks have become more probable due to elevated economic and geopolitical uncertainties amid ongoing military conflicts and uncertain policies of newly elected governments, according to the report tht was released Tuesday.

"In particular, the widening disconnect between uncertainty and market volatility increases the chance of sudden surges in volatility and sharp asset repricing, which could be amplified by the vulnerabilities," said the IMF's Global Financial Stability Report.

"The market turmoil in early August 2024—when stock market volatility spiked in both Japan and United States and global asset prices declined significantly—provided a glimpse of the violent reactions that can ensue when spikes in volatility interact with the use of leverage by financial institutions to create nonlinear market reactions and hasten sell-offs," it said in the report titled, Steadying the Course: Financial Markets Navigate Uncertainty.

The IMF, however, noted that global economic activity has moderated and inflation has continued to slow around the world.

As major central banks have been implementing monetary easing, financial conditions have remained accommodative, while emerging markets have remained resilient and asset price volatility has stayed relatively low, it added.

The financial agency warned that further rises in economic uncertainty could increase downside risks to future growth, asset prices and growth in bank lending.

"For example, assuming global real economic uncertainty jumps by an amount equivalent to its rise during the global financial crisis, the downside outcome (specifically, the 10th percentile) of one year-ahead global real GDP growth worsens by 1.2 percentage points," it said.

"Uncertainty can also trigger cross-border spillover effects through trade and financial linkages," it added.