Global Economy Turning Corner of Great Recession, But Obstacles Ahead

Washington, April 3- The global economy is turning the corner of the Great Recession, although overall growth remains too slow and weak, IMF Managing Director Christine Lagarde said.

In a speech at the School of Advanced International Studies (SAIS) in Washington ahead of the 2014 IMF-World Bank Spring Meetings, Lagarde added that “a modest and fragile recovery is under way that now needs to change gears toward more rapid and sustainable growth”.

Lagarde pointed to a few broad trends in the global economy, noting that economic activity in the advanced economies, such as United States, euro area, and Japan, is picking up, but at varying speeds.

Growth rates in emerging market countries, while slowing, are among the highest in the world, she said, especially in emerging Asia—a continuing “bright spot” in the global economy. Likewise, growth in sub-Saharan Africa continues at a strong pace. Conditions are more challenging in the Arab countries in transition, Lagarde reported, where growth remains held back by a difficult social and political situation.

Short-term roadblocks

Lagarde cautioned that there are short-term roadblocks on the path to stronger and more durable growth. Old obstacles include finishing the financial sector reform agenda; continuing high debt levels in many countries; and stubbornly high unemployment.

New roadblocks include:

• The emerging risk of “low-flation”—a potentially prolonged period of low inflation that can suppress demand and output—and suppress growth and jobs.

• Risk of heightened market volatility associated with the tapering of quantitative easing in the advanced economies, and with a generally less benign external financial climate.

• Geopolitical tensions could cloud the global economic outlook. The situation in Ukraine is one which, if not appropriately managed, could have broader spillover implications.

Lagarde said the costs of continued sluggish growth are high: modest income gains and gradual reductions in unemployment. “The risk is that without sufficient policy ambition, the world could fall into a medium-term low growth trap”.

Cruising speed for growth

The objective is to reach 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. Areas of emphasis include:

• Higher, well-prioritized investment to increase potential output and to create jobs.

• Inclusive labor market reforms that can go a long way in boosting potential growth.

• Reforms to product and services sectors that can break down vested interests, boost competition, and unleash huge growth and employment potential.

Strengthening international cooperation

“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?” Lagarde asked.

Lagarde noted that the major countries of the Group of Twenty leading industrial and emerging market economies had recognized, at their meeting in Australia in February, that —with the right policy actions by countries and the right cooperation across countries—more than 2 percent could be added to global growth over the next five years.

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