Keep Covid rescue programmes or risk triggering stock market crash, warns IMF

Governments and central banks must maintain their pandemic rescue programmes or risk triggering a stock market crash, the International Monetary Fund has said.

Warning that there were legitimate concerns about a share price bubble, the Washington-based organisation said that without continued low interest rates and government subsidies it was possible a “correction” in stock markets would occur.

In a report issued to coincide with the World Economic Forum, the IMF said investors had ignored recent data showing major economies slowing as the pandemic persisted through the winter months. There was also the prospect that vaccination programmes would take longer to deploy, especially across the developing world, forcing governments to maintain restrictions for a longer period.

Financial markets have rebounded since last March and some have soared to fresh highs. The S&P 500, which accounts for a cross-section of the largest 500 US companies, slumped by a third last spring from a high before the pandemic of 3,386. Since then it has climbed to 3,849, up more than 13% from the level in February 2020.

The FTSE 100 in London was at 7,534 in January last year and has struggled to recover from a drop in value of 2,500 points. It grew to a year’s high of 6,873 earlier this month before sliding to 6,638 this week.

Tobias Adrian, the IMF’s head of financial stability, and his deputy, Fabio Natalucci, said in a blog to accompany the report that investors were able to bet on a “persistent policy backstop” and that a “sense of complacency appears to be permeating markets”.

They said a herd mentality had gripped markets, which meant the majority of investors were ignoring warning signs of an economic slowdown and a longer climb back to pre-pandemic levels of activity.

“This raises the risk of a market correction or ‘repricing’,” they said. “A sharp, sudden asset-price correction – for example, as a result of a persistent increase in interest rates – would cause a tightening of financial conditions. This could interact with existing financial vulnerabilities, creating knock-on effects on confidence and jeopardising macro-financial stability.”

They said this left central banks with no option but to maintain low interest rates and governments to continue state support programmes, because to reduce their scope or generosity would cause a panic among investors.

The report said a shortsighted approach to vaccinations that restricted access to developed countries was a particular threat.

“Delayed access to comprehensive healthcare solutions could mean an incomplete global recovery and endanger the global financial system. With emerging market economies accounting for about 65% of global growth (about 40% excluding China) over 2017–19, delays in tackling the pandemic in such countries may bode ill for the global economy,” it said.

“Supply chain disruptions could affect corporate profitability even in regions where the pandemic is under control. And because growth is a crucial ingredient for financial stability, an uneven and partial recovery risks jeopardising the health of the financial system.”