The International Monetary Fund’s top official Monday acknowledged faster-than-expected global economic recovery, but cautioned governments against paring their anti-crisis measures too quickly, saying doing so could set off another downturn.
IMF Managing Director Dominique Strauss-Kahn noted that private sector demand is “still very weak” in most nations, while jobless rates could rise in the U.S., Europe and Japan in the months ahead.
His remarks underscore that despite signs of rebound in the global economy, many key international players still find it too soon for policymakers to start withdrawing from the extraordinarily stimulus steps they have adopted over recent years to fight the global economic crisis.
In Asian countries, recovery is “stronger and faster” than the IMF forecast last autumn, the head of the 186-member fund said at a news conference in Tokyo. “Even in advanced economies (in general), recovery (has been) faster and has come sooner than expected.”
But “if you exit too early (from the stimulus steps), then you’ll have the risk of going back into recession,” he added.
While the IMF isn’t forecasting a double-dip recession–or a return to recession after a brief period of growth–he said: “You never know. It may happen.”
The problem is that many governments and central banks have already exhausted many tools in their policy box to support growth, he said. If too quick an end to stimulus measures causes a new downturn, “I don’t know what we can do,” he said.
Although Strauss-Kahn didn’t clearly answer the question of what he thinks of concern over monetary tightening by China, he said: “Certainly, we need rapid growth in China.”
Private-sector demand and employment conditions, which could be the “best” indicators to determine the timing of withdrawal, are weak in many economies, he said.
Private demand remains dependent on government expenditure and is “not on a sustainable path” in most countries, he said. “There’s a risk of…unemployment rising in coming months” in the U.S. and Europe from their current rates of 10%, and in Japan from around 5%, he said.
To be sure, Strauss-Kahn acknowledged that it is important for policymakers to “set out now to design exit strategies” partly to reassure markets that they know what they are doing.
Also he noted that if central banks keep markets awash with cash for too long, that could invite other problems, such as asset bubbles. Continuing aggressive budgetary spending would in the meantime add to public debt, which is already growing in many nations due to their recent deficit spending.
Still, such risks are outweighed by the risk of another downturn, and “our advice is, (be) very careful not to exit too early,” he said.
Strauss-Kahn indicated that the same applies to Japan, which he is visiting to meet with policymakers. While Tokyo needs to come up with a plan to return to a “more sustainable path in terms of fiscal policy,” he said “the need to avoid any risk of a new downturn is still there.”
Japan’s public debt level is the worst among industrialized nations at 180% of gross domestic product. Prime Minister Yukio Hatoyama’s government has yet to craft a fiscal reform plan of its own, saying it should wait until Japan’s economy stabilizes.
In a written statement issued later in the day, Strauss-Kahn noted that Japan’s current upturn is “still sluggish, with private demand and labor markets weak.” And he went on to praise the mid-term growth strategy announced by the Japanese government last month, which has made it a goal to achieve average annual inflation-adjusted expansion of more than 2% over the next 10 years.
The growth plan is “very timely and should support efforts to rebalance the global economy,” which is still reliant on U.S. consumption for growth, Strauss-Kahn said in the statement. “We welcome the emphasis being placed on fostering new demand opportunities and promoting regional economic integration, which will help Japan capitalize on the emergence of Asia as a key engine of global growth.”
The IMF head said that during his visit, he had held talks with Hatoyama, Finance Minister Naoto Kan, and Bank of Japan Gov. Masaaki Shirakawa, and their discussions were focused on “prospects for the ongoing global recovery.”
By Takashi Nakamichi – wsj.com
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