Policymakers Must Avoid Mistakes That Could Harm Global Recovery: IMF Chief

WASHINGTON—The head of the International Monetary Fund (IMF) warned policymakers on Wednesday to avoid mistakes that could derail a fragile global recovery.

IMF Managing Director Christine Lagarde said the U.S. Congress should promptly increase the U.S. government’s borrowing limit and the Federal Reserve should avoid withdrawing its financial support too rapidly.

Lagarde noted that the world economy is still feeling the impact of the Great Recession and 2008 financial crisis.

“The crisis still lingers. Yet, optimism is in the air,” she said in a speech at the National Press Club. “The deep freeze is behind and the horizon is brighter.”

Lagarde said the IMF will update its World Economic Outlook next week and the revision will show slightly stronger growth than the last forecast it made in October.

“Momentum strengthened in the latter half of 2013 and should strengthen further in 2014, largely due to improvements in the advanced economies,” she said.

But Lagarde cautioned that there were still risks. She specifically mentioned the threat of deflation, a period of falling prices that can freeze economic activity. When it happens, consumers and businesses postpone purchases because they are expecting prices to drop further.

She noted that many nations currently had inflation running below the targets set by central banks. A key inflation gauge in the U.S. shows prices have risen less than 1 percent in the past year, well below the Fed’s 2 percent target.

“With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery,” Lagarde said. She called deflation “the ogre that must be fought decisively.”

Lagarde said Europe is turning the corner from recession. But she described that recovery as uneven. Some European nations are still burdened by high debt and credit restraints. She said the European Central Bank could do more to help the recovery by providing targeted lending.

For big emerging economies such as China, Lagarde said financial regulation needed to be strengthened and officials will need to be alert for any threats such as asset bubbles.

“Now that the global economy looks more stable, the big priority for policymakers in 2014 is to fortify the feeble global recovery,” she said.

The Obama administration failed this week to win support from congressional negotiators to include an increase in U.S. support for the IMF in a US$1.01 trillion spending bill.

Without the U.S. support, the 188-nation lending agency cannot implement a plan adopted in 2010 to double its resources for lending to troubled countries. The plan would also increase the voting power of emerging-market countries, such as China, Brazil, and India, while reducing the voting strength of some Western European nations.

Asked about the failure to win congressional approval for the IMF budget increase, Lagarde said she remained hopeful the administration will eventually succeed in getting the measure passed by Congress.

She said an IMF with greater resources for lending would be better able to help countries in financial crisis and that would be in the best interests of the U.S.


  • Michael678

    Falling labor share of national income needs to be added to your list.
    More so then inequality of income. Capital income has a much lower
    propensity fuel demand than even the labor income of the rich. And
    capital income share has risen quite a bit..

    Low labor share is keeping the prescribed Central bank rate below 0%.
    The Central Banks are fighting a losing battle. Labor share has not just
    fallen, it has actually anchored into a new lower normal after the 2001
    and 2008 recessions. The result is that the utilization of labor and
    capital are both constrained to lower levels. The Central Bank interest rate then
    goes lower in a vain attempt to raise them back up, but they won’t go
    back up because low labor share is constraining them.

    Labor share continues to fall as countries try to increase national
    savings in an attempt to raise exports. Lowering labor share so broadly
    is bringing down the global economy.

    Central bankers are destroying what was left of a healthy economy, and I think they know it. They claim to be trying to boost the economy, but they are really attempting to save the banks, at the expense of all else.