Last updated: October 13, 2012 1:22 pm

IMF warns recovery could be derailed

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The International Monetary Fund on Saturday sounded a note of cautious optimism on the global economy, but warned that recovery will be derailed if officials relent on policy commitments.

In a communiqué to mark the conclusion of the IMF’s annual meetings in Tokyo this week, members of the fund said: “Key policy steps have been announced, but effective and timely implementation is critical to rebuild confidence.”

Christine Lagarde said at a press conference following the release of the communiqué that members had shown at meetings over recent days a “very strong commitment” to act. “We might not always agree on everything, but there is consensus that collective action is going to produce results,” the managing director said.

The communiqué praised recent efforts of European policy makers, but called on officials in the bloc to ensure that the Europe Central Bank’s Outright Monetary Transactions programme is tapped. “The ECB’s decision on OMT and the launch of the European Stability Mechanism are welcome. But further steps are necessary,” the communiqué said.

The fund shares the ECB’s concerns that, if the OMT remains unused, markets will view the programme as lacking credibility and yields on peripheral debt will rise. These concerns are not shared by German officials.

The communiqué also called on the United States to resolve the Congressional dispute over the fiscal cliff and urged Japan to make further progress towards fiscal consolidation in the medium term. The communiqué signalled that emerging markets and developing economies must step up their policy response if global growth deteriorated.

The tone of cautious optimism in the communiqué jars with the conclusions of the fund’s World Economic Outlook and Global Financial Stability Report.

The WEO downgraded forecasts for global growth and the GFSR warned of a dramatic contraction in European banks’ balance sheets, especially those of lenders in peripheral Europe.

Some European officials have queried the validity of some of the research contained in the reports, such as the WEO’s analysis of fiscal multipliers, which suggests that the austerity does far more damage to growth than governments had assumed.

In a press briefing on Saturday, Mario Draghi, ECB president, indicated that he viewed the GFSR’s conclusions on European banks’ deleveraging as misleading. “European banks are now pretty resilient. Recapitalisation has made progress. Leverage ratios have gone down,” Mr Draghi said. “Our figures for deleveraging are different from the GFSRs -and not for the first time.”

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