World Economies Warn Of Global Risks, Call For Bold Action

The International Monetary Fund’s member countries on Saturday said bold action was needed to bolster the global economic recovery and they urged governments not to squelch growth by tightening budgets too drastically, although Germany poured cold water on the idea of a new global “crisis.”

With Japan’s economy floundering, the euro zone at risk of recession and even China’s expansion slowing, the IMF’s steering committee said focusing on growth was the priority.

“A number of countries face the prospect of low or slowing growth, with unemployment remaining unacceptably high,” the International Monetary and Financial Committee said on behalf of the Fund’s 188 member countries.

The Fund this week cut its 2014 global growth forecast to 3.3 per cent from 3.4 per cent, the third reduction this year as the prospects for a sustainable recovery from the 2007-2009 global financial crisis have ebbed, despite hefty injections of cash by the world’s central banks.

The IMF has flagged Europe as the top concern, a sentiment echoed by many policymakers, economists and investors gathered in Washington for the Fund’s fall meetings.

European officials sought to dispel the gloom. European Central Bank President Mario Draghi said the drag from fiscal tightening in the euro zone was set to fade, while German Finance Minister Wolfgang Schaeuble downplayed the idea that the region’s largest economy was at risk of recession.

“There is no reason to talk about a crisis in the global economy,” he said.

The IMF committee called for fiscal policy flexiblity, but efforts to provide more room for France to meet its European Union deficit target looked set to founder on Germany’s insistence that the agreement on fiscal rectitude was set in stone and that the bloc would not be writing any new checks.

STORM CLOUDS GATHER

The United States has been a relative bright spot in the otherwise darkening global economic picture, and investors have rushed into dollars as a result.

Still, while U.S. growth has picked up, soft inflation and wage growth suggest the slowest-ever postwar recovery is not delivering a sustained boost to demand, and concerns are growing that the global slowdown will undercut the U.S. economy as well.

Two top officials from the U.S. Federal Reserve on Saturday highlighted growing risks. The dovish head of the Chicago Federal Reserve Bank, Charles Evans, said the central bank would have to launch a fresh bond-buying program if the economy were hit by an economic shock.

Fed Governor Daniel Tarullo said the U.S. economy was facing deep problems – from decaying infrastructure to a polarized distribution of income – that could weaken demand in the future.

“I am worried about growth around the world, there are more downside risks than upside risks,” he said at a conference of the Institute of International Finance in Washington.

The IMF panel urged nations to carry out politically tough reforms to labor markets and social security to free up money to invest in infrastructure to create jobs and lift growth.

“Our key concern is to look ahead so that we avert …. the very real risk of a prolonged period of subpar growth,” said Singaporean Finance Minister Tharman Shanmugaratnam, the panel’s chairman.

The committee also called on central banks to be careful when communicating changes in policy in order to avoid financial market shocks. While not naming any central banks, the warning appeared aimed at the Fed, which is set to end its current bond-buying program this month. Its next step, expected in mid-2015, would be to raise interest rates.

The Fed has debated a change to its commitment to holding rates near zero for a “considerable time” at its recent policy meetings, but is stepping gingerly to avoid roiling financial markets. It does not want a repeat of the “taper tantrum” it touched off last year when it signaled its easing of monetary policy was drawing to a close.