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WEF warns global economy 'ill-prepared for a downturn'

·Senior City Correspondent, Yahoo Finance UK
A lightning bolt striking a Stalin era skyscraper during a storm over Moscow
A lightning bolt striking a Stalin-era skyscraper during a storm over Moscow. Photo: Mladen Antonov/AFP/Getty Images

The world is less prepared for a global economic shock than it was when the 2008 financial crisis struck, the World Economic Forum (WEF) has warned.

WEF, the Swiss-based non-profit that brings together business chiefs and world leaders, said on Wednesday that the global economy is more vulnerable to a severe economic shock due to a decade of weak productivity growth and the fact that policymakers have used most of their tools to stabilise growth already.

“While the predicted slowdown is unlikely to be nearly as severe as the Great Recession of 2008–2009, policy-makers generally have fewer policy options today than they did back then to stimulate aggregate demand,” WEF wrote in its annual Global Competitiveness Report, released on Wednesday.

“Monetary policy may have run out steam and some countries are facing a liquidity trap. Furthermore, the geopolitical context is more challenging than in 2007, with gridlock in the international governance system, and escalating trade and geopolitical tensions fuelling uncertainty, which holds back investments, and increases the risk of supply shocks.”

The warning comes just a day after new International Monetary Fund (IMF) chief Kristalina Georgieva said the globe is in “a synchronised slowdown” and flagged cuts to IMF growth forecasts due next week.

Fears about a possible global downturn have been growing throughout 2019, as eurozone growth has flatlined, China’s economy has slowed, and possible recession warning signals have begun to flash in the US. The OECD said last month that the world economy is facing “facing increasingly serious headwinds.”

WEF said on Wednesday that “persistent weakness” in productivity growth in the last 15 years or so meant the global economy was more “frail.” As a results, slowdowns or recessions could have magnified effects.

The IMF’s Georgieva on Tuesday said governments should start borrowing and spending to boost growth, echoing similar calls from European Central Bank chief Mario Draghi and the OECD.