International Monetary Fund (IMF) head, Christine Lagarde, speaking at the National Press Club in Washington DC, has said the organization predicts that 2014 can be a year of solid growth for the world economy. The global recovery is moving forward, but could be derailed by the emergence of deflation in the developed world. The former French Finance minister, Lagarde, said, “With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery.” According to Lagarde the recovery could be moving faster; adding that even though US and Eurozone growth is speeding up, global economic growth “is still stuck in low gear,” and is not reaching the 4% growth potential the IMF has set for globe’s economy as a whole.
Fears of Deflation
Lagarde put it ominously, “If inflation is the genie, then deflation is the ogre that must be fought decisively.” She pointed especially to the US and the Eurozone saying that both should focus on spurring growth by continuing the policies that have helped the world’s economy grow over the past couple of years. On the Federal Reserve she said that it should steer clear of “premature withdrawal of monetary support.” The Fed already committed to reducing bond purchases by $10 billion at the end of 2013, and many commentators think that the entire $85 billion program will end by the close of 2014. Ms. Lagarde did not, however, say anything about how long the IMF thinks the US stimulus should last. Regarding the Eurozone, the IMF chief said that it should focus more on growth policies especially that of targeted lending. Ms. Lagarde was quoted as saying that, “Central banks should return to more conventional monetary policies only when robust growth is firmly rooted.”
Asset Bubbles and Rising Debt Fears as Easy Money Policies are Slowed
Stock market gains in 2013 were enormous, hitting all-time highs a number of times during the year. The overall sentiment is positive as we move into 2014, but the specter of slowing quantitative easing policies may prove dangerous for weaker economies that have been benefiting from such policies in larger nations and economic unions. Lagarde added, “Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven.”