IMF Says Deflation an Increasing Threat to Global Recovery

The International Monetary Fund (IMF) expects global economic growth to improve this year, but it will probably remain below its potential of about 4%, according to its managing director, Christine Lagarde.

In a speech at the National Press Club in Washington DC, Lagarde also warned that that the gradual recovery was still vulnerable. “With inflation running below many central banks’ targets, see rising risks of deflation, which could prove disastrous for the recovery,” she told her audience. “If inflation is the genie, then deflation is the ogre that must be fought decisively.

“Central banks should return to more conventional monetary policies only when robust growth is firmly rooted,” she added. This made it critical that the US Federal Reserve avoids “premature withdrawal of monetary support.” Last month the Fed confirmed a
modest reduction in its economic stimulus programme
from January 2014, a process dubbed ‘tapering’ that analysts believe could lead to a full exit by the end of 2014.

The overall economic picture was more encouraging, said Lagarde. “This crisis still lingers. Yet, optimism is in the air: the deep freeze is behind, and the horizon is brighter.

“My great hope is that 2014 will prove momentous – the year in which the ‘seven weak years’, economically speaking, slide into ‘seven strong years’.”

Although the world economy was strengthening at the end of 2013, it is ‘still stuck in low gear”, according to Lagarde. “This means that the world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle.”

For the eurozone area, the European Central Bank (ECB) could do more to spur growth, the IMF chief said. “Targeted lending, for example, could help reduce financial fragmentation. The forthcoming review of asset quality and stress tests can also help, but only if they are done in an even-handed and credible manner.”

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