The world is sleepwalking into a fresh crisis as investors start to lose faith in policymakers’ ability to revive the global economy, according to the International Monetary Fund.

In its bluntest warning to date on the costs of policy inaction, the IMF said “financial and economic stagnation” could take hold unless governments prevented a “pernicious feedback loop of fragile confidence, weaker growth, low inflation and rising debt burdens” from forming.

José Viñals, the head of the IMF’s financial stability division, said a prolonged slowdown could knock around 4pc off global output relative to current expectations over the next five years amid repeated bouts of market turmoil.

Mr Viñals said a $1.3 trillion (£912bn) corporate debt timebomb in China also posed “potentially serious challenges” to financial stability if defaults pushed banks over the edge.

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