Lagarde Warns of Risks to Global Economic Recovery

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[Glob­al­ists Take; then they Sub­si­dize, then they Aban­don.]

IMF’s Lagarde warns of risks posed to global recovery from Fed tapering and eurozone deflation.

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DAVOS, Switzer­land (AP) — The Inter­na­tion­al Mon­e­tary Fund’s man­ag­ing direc­tor warned Sat­ur­day of the risks posed to glob­al eco­nom­ic recov­ery from the reduc­tion of the U.S. Fed­er­al Reserve’s mon­e­tary stim­u­lus and falling prices in the euro­zone.

Despite grow­ing evi­dence the glob­al econ­o­my is far­ing bet­ter than it has for years, Chris­tine Lagarde said pol­i­cy­mak­ers around the world have to be alert to the poten­tial reper­cus­sions from the Fed’s “taper­ing,” a pol­i­cy change it decid­ed to embark upon in Decem­ber.

So far, the move has been min­i­mal — it has reduced the amount of bonds it buys each month by $10 bil­lion to $75 bil­lion — but many econ­o­mists think that it could end this year if the U.S. eco­nom­ic recov­ery gains steam.

Over the past few years, the Fed’s stim­u­lus, in its var­i­ous guis­es has had a big impact on finan­cial mar­kets. As well as shoring up stock mar­kets around the world, the new mon­ey cre­at­ed by the stim­u­lus has flown to emerg­ing economies as investors sought out bet­ter returns. Cur­ren­cies, such as the Indi­an rupee and the Brazil­ian real, have been ben­e­fi­cia­ries. The with­draw­al could prompt a reverse in those flows and see their cur­ren­cies come under pres­sure.

This is a new risk on the hori­zon and real­ly needs to be watched,” Lagarde said in a dis­cus­sion about the glob­al eco­nom­ic out­look at the World Eco­nom­ic Forum.

Though the shock­waves that have hit Argenti­na this week weren’t specif­i­cal­ly about taper­ing, the tur­moil the country’s cur­ren­cy expe­ri­enced — it fell by near­ly 15 per­cent on Thurs­day alone — was felt through­out the world, prompt­ing stock mar­kets to post broad-based declines.

Lagarde also cau­tioned about the out­look for the 18-coun­try euro­zone. Though the euro­zone has emerged from its longest-ever reces­sion and many of the bailed-out coun­tries appear head­ed for mod­est growth, infla­tion has fall­en sharply. At last count, it was down at 0.8 per­cent in the year to Decem­ber, way below the Euro­pean Cen­tral Bank’s tar­get to keep price ris­es just below 2 per­cent.

Many econ­o­mists have wor­ried that the euro­zone may be about to suf­fer a debil­i­tat­ing bout of defla­tion, which Japan has expe­ri­enced for the best part of two decades. Falling prices can hurt an econ­o­my as con­sumers post­pone spend­ing in the hope of get­ting cheap­er deals in the future while busi­ness­es fail to inno­vate and invest.

Lagarde said the IMF thinks there’s 15 to 20 per­cent chance that the euro­zone may suf­fer defla­tion.

The risk is that longer term expec­ta­tions are anchored at a much low­er lev­el that it is cur­rent­ly asso­ci­at­ed with,” Lagarde said.

Get­ting out of a defla­tion­ary spi­ral can be huge­ly dif­fi­cult. Japan is now under­tak­ing a major pol­i­cy exper­i­ment — dubbed “Abe­nomics” after Prime Min­is­ter Shin­zo Abe — involv­ing a mas­sive mon­e­tary stim­u­lus, more gov­ern­ment spend­ing and big struc­tur­al reforms. The hope is to get infla­tion up at 2 per­cent.

The country’s finance min­is­ter, Haruhiko Kuro­da, said the ear­ly signs were pos­i­tive and he voiced some opti­mism over the country’s growth.

We are only half way,” he said. “There’s still a long way to go.”