Great Recession over, but global obstacles remain, says IMF chief

Although the Great Recession is over and the world economy is turning the corner, there are still global obstacles that inhibit faster growth, said Christine Lagarde, Managing Director of the International Monetary Fund (IMF). She added that overall global economic growth is still too slow and fragile.

Lagarde said in a speech at the School of Advanced International Studies (SAIS), Washington that “a modest and fragile recovery is under way that now needs to change gears toward more rapid and sustainable growth.”

The IMF chief urged central bankers to take more aggressive steps to boost growth, because although the global economy is recovering it is doing so at a snail’s pace.

Lagarde said:

“More monetary easing, including through unconventional measures, is needed in the Euro Area to raise the prospects of achieving the ECB’s (European Central Bank’s) price stability objective. The Bank of Japan also should persist with its quantitative easing policy.”

Lagarde explained that economic activity in the major advanced economies – Japan, the Eurozone and the US – is accelerating, but not at the same speeds.

Although growth rates in the emerging markets are slowing, they are “among the highest in the world,” especially in the Asian economies.

The Sub-Saharan African nations are growing at a strong pace. Lagarde reported that conditions are “more challenging” in the Arab nations in transition, where social and political problems are undermining economic expansion.

Short-term global obstacles

Lagarde warned that there are some short-term obstacles along the path to more vigorous and durable economic growth. Old obstacles include extremely high and persistent unemployment, excessively high debt levels in many nations, and completing the financial sector reform agenda.

New obstacles include:

“Low-flation” risk – during a period of very low inflation consumers and businesses postpone spending because they suspect prices might fall, resulting in declining demand and output, which slows down growth and suppresses the creation of jobs.

Market volatility risk – caused by the tapering of quantitative easing in the advanced economies plus a “generally less benign external financial climate.”

Geopolitical tensions – have the potential to affect the global economic outlook. An example is the situation in Ukraine, which “if not appropriately managed, could have broader spillover implications.”

According to Lagarde, the costs of persistent sluggish growth are high, with painfully slow reductions in unemployment and income gains. “The risk is that without sufficient policy ambition, the world could fall into a medium-term low growth trap,” she added.

Aim is for cruising speed for growth

The global economy needs to strive for “cruising speed for medium-term growth,” Lagarde declared, “With space for supportive macroeconomic policy narrowing in many countries, the role of structural reforms as a policy lever will increase.”

Governments need to focus on:

  • Greater, well-prioritized investment to create jobs and increase potential output.
  • Inclusive labor market reforms that can contribute significantly to economic growth.
  • Service and product sector reforms that can boost competition, break down vested interests, and free economies so that they may reach their full potential and create employment.

Strengthening international cooperation

Lagarde asked:

“At a time when the world is still recovering from the Great Recession—and at a time when geopolitical tensions are increasing – how can we strengthen the international cooperation that is essential to address these challenges?”

More than 2% could be added to worldwide economic growth over the next five years if the right policy actions were taken by countries, something the members of the Group of 20 leading emerging and advanced economies had acknowledged at their meeting in Australia in February, Lagarde noted.

“This would place the global economy on a substantially different trajectory from today,” she said.

Next week, Central Bank Governors and Finance Ministers of 188 countries will gather in Washington for the IMF Spring Meetings.