Markets for stocks and other risky assets could suffer a second swoon if the coronavirus spreads more widely, lockdowns are reimposed or trade tensions surge again, the International Monetary Fund warned on Thursday.
Equity markets tailspinned into bear market territory in record time earlier this year as the virus and related lockdowns pounded sentiment, but they have broadly rallied from their March 23 low.
The S&P, which fell 34 per cent in just 23 trading days, has been boosted by central bank support, and is now roughly 10 per cent off its record high.
“A disconnect between financial market optimism and the evolution of the global economy has emerged,” said the IMF in its Global Financial Stability Update. The disconnect “raises the risk of another correction in risk asset prices,” the IMF said, adding that valuations across many equity and corporate bond markets appear “stretched.”
The warning came just a day after the IMF slashed its 2020 global economic forecasts further.
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The IMF said it now expects global output to shrink by 4.9 per cent, compared with a 3.0 per cent contraction predicted in April, when it used data available as widespread business lockdowns were just getting into full swing.
A recovery in 2021 also will be weaker, with global growth forecast at 5.4 per cent for the year compared to 5.8 per cent in the April forecast. The Fund said, however, that a major new outbreak in 2021 could shrink the year’s growth to a barely perceptible 0.5 per cent.
Although many economies have begun to reopen, the Fund said that the unique characteristics of lockdowns and social distancing have conspired to hit both investment and consumption.
“Thus, there is a broad-based aggregate demand shock, compounding near-term supply disruptions due to lockdowns,” the IMF said in an update of its World Economic Outlook forecast.
Advanced economies have been particularly hard-hit, with U.S. output now expected to shrink 8.0 per cent and the euro zone 10.2 per cent in 2020, both more than 2 percentage points worse than the April forecast, the IMF said.
In Canada the IMF is now projecting GDP to contract by 8.4 per cent in 2020, 2.2 percentage points below its April estimate. The Fund now sees the Canadian economy growing by 4.9 per cent in 2021.
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Latin American economies, where infections are still rising, saw some of the largest downgrades, with Brazil’s economy now expected to shrink 9.1 per cent and Mexico’s 10.5 per cet and Argentina’s 9.9 per cent in 2020.
China, where businesses started reopening in April and new infections have been minimal, is the only major economy now expected to show positive growth in 2020, now forecast at 1.0 per cent compared to 1.2 per centin the April forecast.
The IMF said that more policy actions from governments and central banks would be needed to support jobs and businesses to limit further damage and set the stage for recovery.
— With a file from Erica Alini at Global News