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Economic recovery remains tentative: IMF

Economic recovery around the world remains tentative and the return to growth is still vulnerable to new shocks, a senior International Monetary Fund official warned on Thursday.

New York: Economic recovery around the world remains tentative and the return to growth is still vulnerable to new shocks, a senior International Monetary Fund official warned on Thursday.

In a speech to the Japan Society, IMF First Deputy Managing Director John Lipsky said financial conditions have improved but are far from normal. Mounting credit losses, especially in commercial real estate, could dampen the recovery in business investment and inventories, he said.

"Despite the generally improving data, however, the global economy still lacks the typical post-downturn growth momentum that serves to build confidence in the sustainability of recovery," Lipsky cautioned in prepared remarks. "This is especially true of the advanced economies."

He said he worried that the unprecedented cooperation among countries to tackle the crisis could fade as the global economy begins to recover and countries are pulled in different directions.

One way to tackle this was to recognize the increasing importance of emerging economic powers by giving them a greater say in the global financial system.

As the world emerges from more than a year of financial turmoil and recession, Lipsky said advanced economies need to design credible plan to reduce their growing debt levels. The IMF forecasts government debt in rich countries will reach nearly 120 percent of gross domestic product by 2014.

He said the fiscal challenges in rich countries were "formidable" and changes to taxes and spending would not be easy to design or implement. Reducing the debt levels would require fiscal adjustments in the order of 8 percentage points of gross domestic product in advanced economies, he added.

Lipsky said monetary policy could likely remain accommodative for some time in rich economies given the absence of inflationary pressures.

The IMF`s No 2 official urged governments to act prudently when withdrawing the excess liquidity they`ve poured into their economies over the past year, but urged authorities to wait until a recovery was well on its way before they implemented exit strategies.

"The withdrawal of stimulus in the current circumstances should await a clear-cut and sustained recovery in private demand, as well as a return to more entrenched financial stability," Lipsky added.

He said the recent surge in capital flows into emerging markets could be a "catch up" from the previous sudden withdrawal from risk, and capital controls may be appropriate if the surge is temporary.

"But "temporary" capital controls should not be used to paper over real problems, or to avoid needed policy adjustment," Lipsky added.

Overall, he said economic policy should focus on restoring sustained global growth, which also means that export-led strategies at the heart of Asia`s rapid growth "may be past its prime".

In countries with large deficits, such as the United States, trimming spending will be imperative, Lipsky said. Financial sector reforms will also be crucial, as will expanded regulations that cover all systemically important institutions, he added.

Lipsky said the IMF has not been asked to take on any role in assisting the Greek government cope with its current budget problems.

The fiscal deterioration in the euro zone`s weakest member prompted Fitch Ratings to cut the nation`s credit rating to BBB-plus with a negative outlook on Tuesday.

"We would become involved only with the request of the European authorities, and it goes without saying the Greek authorities. Has that occurred? No," Lipsky, told reporters after his speech.

Bureau Report

From Zee News

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