Withdrawal from stimulus measures risks 'double dip' recession, says IMF
International Monetary Fund (IMF) managing director Dominique Strauss-Kahn has warned that countries risk a “double dip” recession should government stimulus measures be withdrawn too soon.
Speaking at the Tokyo Foreign Correspondents Club yesterday, Strauss-Kahn said while the global economy is recovering from the global financial crisis faster than expected, growth is still largely driven by government stimulus measures.
Strauss-Kahn said while governments are now saddled with high debts from the anti-crisis measures, the global economy, particularly advanced economies, risks falling back into negative growth should the stimulus measures be removed too quickly.
“If they exit too early and we have a new downturn in growth, then really I don’t know what we can do,” Strauss-Kahn said. “A lot of our toolkit in terms of fiscal and monetary policy has been used. If we fall back into negative territory for growth it will be very, very difficult to solve the problem, so our advice is to be very careful.”
Strauss-Kahn added that the best indicator to time the exit is private demand and employment.
“In most countries, growth is still supported by government policies. For as long as you do not have private demand strong enough to offset the need of public policy, you shouldn’t exit,” he said.
Strauss-Kahn also highlighted the concern that continuing unemployment posed the threat of social unrest and even conflict if the problem was not dealt with. Another concern was large sums of money flowing into emerging economies as investors' risk appetite rose, which posed the risk of both creating asset bubbles and of abrupt halts in inflows.
Strauss-Kahn also noted that the financial system remains damaged and that a recovery could only occur once companies and banks have cleaned up their balance sheets, highlighting Japan’s struggles with its own financial crisis since the late 1990s.
He said the focus for 2010 should be on building a sustainable recovery through the creation of jobs and addressing the roots of the crisis through financial sector reform. He said governments should also build on the global co-operation that developed during the crisis.
From the IMF’s perspective, Strauss-Kahn said it would be pursuing change, which has already seen the introduction of more flexible loan facilities with streamlined conditionality. He added that the fund would push ahead with changes to its governance structure to better reflect the weight of dynamic emerging economies as well as reviewing its mandate.
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