IMF warns global economy faces heightened risks amid volatility, rising debt

The International Monetary Fund Tuesday said the global economy has reached a critical point, facing mounting internal and external imbalances and vulnerabilities that threaten financial stability.

In its latest Financial Stability Report, the IMF’s Executive Board warned that major policy shifts worldwide are fueling uncertainty, with potentially far-reaching consequences for the global economy.

Directors noted that financial markets are increasingly volatile, with stretched asset valuations and tightening financial conditions raising near-term risks.

The report highlighted several key concerns, including the potential for sharp corrections in asset prices—triggered in part by geopolitical tensions—rising leverage in the financial system, and growing interconnectedness among non-bank financial intermediaries.

Sovereign debt levels, already elevated, continue to climb, further heightening risks.

IMF Directors agreed that risks to the economic outlook are "firmly tilted to the downside," citing escalating protectionism and policy uncertainty as threats to both short- and long-term growth.

The global economy remains stuck in a low-growth, high-debt environment, they noted, warning that abrupt policy shifts or worsening investor sentiment could trigger sudden asset repricing, exchange rate fluctuations, and capital flow disruptions—particularly in emerging markets.

On fiscal policy, the IMF cautioned that rising uncertainty and higher-than-expected interest rates could push global public debt even higher. Increased defense spending and declining revenues due to trade tariffs may exacerbate the strain.

Higher borrowing costs could also curb critical development spending, worsening financing risks for low-income countries already facing reduced foreign aid.

The report also emphasized that weakened international cooperation on shared challenges—such as climate change and economic resilience—could hinder progress in addressing global development needs.