Global economy in 'dangerous new phase': IMF chief

Xinhua, August 28, 2011

International Monetary Fund (IMF) chief Christine Lagarde warned on Saturday that downside risks to the global economy are rising, and developments this summer have indicated that the global economy is in a "dangerous new phase".

The world risks seeing the fragile recovery derailed, so "we must act now", Lagarde cautioned in a speech delivered at the Federal Reserve Bank of Kansas City Economic Symposium held in Jackson Hole in the US State of Wyoming.

"It is a matter of vision, courage and timing. Decisive action will bolster the confidence that is required to restore and re-balance global growth," noted the IMF managing director.

"We are not without options. We know what needs to be done to support growth, reduce debt and prevent further financial crises," said Lagarde, adding that the world needs a new approach to implement a comprehensive plan in a coordinated global way based on bold political action.

She contended that the fundamental problem is that in these advanced economies, weak growth and weak balance sheets of governments, financial institutions, and households are feeding negatively on each other.

"If growth continues to lose momentum, balance sheet problems will worsen, fiscal sustainability will be threatened, and policy instruments will lose their ability to sustain the recovery," she told the annual gathering of central bankers and economists.

Lagarde held that while fiscal consolidation remains an imperative, macroeconomic policies must bolster growth.

"Fiscal policy must navigate between the twin perils of losing credibility and undercutting recovery," she added.

The precise recovery path is different for each nation, noted Lagarde, adding that "to meet the credibility test, each country needs a dual focus: a primary emphasis on durable measures that will deliver savings tomorrow which, in turn, will help to create as much space as possible for supporting growth today."