Accommodative monetary stimulus has encouraged financial risk-taking, leading to “worrisome” levels of debt with poor credit quality, the Fund says.
“Further escalation of trade tensions and associated increases in policy uncertainty" could result in lower-than-expected growth next year, the IMF says.
The fund sliced two percentage points off its previous forecast for 2018 and 2019 and said U.S. growth would slow to 2.5% next year.
"While it is tempting to sail alone, countries must resist the siren call of self-sufficiency,” Christine Lagarde says.
The government announces new taxes and steep spending cuts as the sliding peso makes it harder to service the country's debt.
The IMF urges countries to "build fiscal buffers now by reducing government deficits and putting debt on a steady downward path."
Credit spreads will widen and defaults will increase, say some portfolio managers. But pinpointing the 'when' is almost impossible.
However, its projection for economic growth in the United States this year remains modest, at 2.2%.
The fund cites uncertainty over Trump's fiscal policy in cutting its U.S. growth forecast to 2.1% for both 2016 and 2017.
In its latest economic outlook, the fund warns that protectionist policies "threaten global economic integration and the cooperative global economic order."
The Fund says a cyclical recovery is not enough to solve the bank profitability problem, recommending a "bold structural reform program."
The Fund reduces its forecast from 2.4% in April and says there is a "clear case" for the Fed to proceed cautiously on interest rates.
