The global economy could experience years of stagnation and ìsub-par growthî, if the Ukraine crisis is left unresolved, inflation does not pick up in Europe and Japan and corporate leverage is not reduced in the US, the IMF head Christine Lagarde has identified.
Ms Lagarde called for policymakers across the globe to take ìbrave actionî in the upcoming few years so that the world economy avoids dropping into a ìlow growth trapî.
She identified that whilst the world economy would grow by over 3% in 2014 and 2015 that nevertheless certain inhibiting factors, such as continued problems in Ukraine and abnormally low inflation rates within the EU, could have
an adverse affect on the globeís economic recovery.
“The…rise of geopolitical tensions could cloud the global economic outlook,” she said.
“The situation in Ukraine is one which, if not well managed, could have broader spill over implications.”
As one of Europeís largest exporters of grain and wheat, Ukraine has a significant role in shaping the price of these goods, and it has been feared that costs of exports will rise sharply if tensions are not resolved soon. Moreover, other commodity prices, such as for gas, are in danger of rising, as Russia supply 25% of Europeís gas needs and these are sent through pipelines in Ukraine.
Ukraineís staggering levels of debt are also a huge cause for concern for the global economy, with the country needing to pay off $13 billion worth of debt this year, and a further $16 billion by the latter stages of 2015.
Last week the IMF identified a huge $18bn rescue package for the Ukrainian economy, in a bid to address this issue, and prevent wider implications arising on the global market.
Inflation deflating EU economy
Ms Lagarde also warned that constant levels of low inflation must be addressed in order to prevent long term levels of economic stagnation within the European economy in the future.
Consistently low inflation within the EU has also led to an augmentation within the level of spare capacity in its countriesí economies, and this has inhibited its overall economic growth when compared to its Western counterparts, the US and Britain, because it hasnít acquired as high levels of investment.
Whilst inflation in the UK and the US has now reached more sustainable levels of 1.7% and 1.1% respectively, a consistent rise in the strength of the euro compared to the dollar and pound in the past two years has meant that import costs have decreased and good prices have lowered, taking inflation to an overall low of just 0.5%.
And Mrs Lagarde has cautioned that a further extended period of lower inflation within the EU could damage its economic recovery, by lowering consumer demand for services and goods as people begin to avoid parting with their money under the belief that costs of goods will continually slide and be cheaper at a later date.
Moreover, a knock on effect would be that governmentís and large companies would experience huge difficulty attempting to pay off their debts.
Ms Lagarde has now urged the European Central Bank (ECB) to adopt a policy of “more monetary easing, including through unconventional measures”.
“There is the emerging risk of what I call ‘low-flation’, particularly in the euro area,” she added.
“A potentially prolonged period of low inflation can suppress demand and output, and suppress growth and jobs.”
Ms Lagardeís remarks come on the eve of a key meeting between ECB policymakers, who are expected to retain the level of inflation in the EU at 0.5% for the time being, despite their president, Mario Draghi, describing sub 1% levels as ëa danger zoneí.
US bond purchasing
Ms Lagarde also urged governments to implement changes to their labour markets in order to incur a higher level of employment creation, and to implement higher levels of public investment in things such as transport in affluent and upcoming countries.
In particular, the IMF head addressed the US directly, arguing that their central banks slowdown within their bond purchasing programme has resulted in higher levels of money being pumped into its economy.
This has had an adverse affect on emerging markets, as it has resulted in investors placing their money back into the US so that they can acquire larger interest rates.
Ms Lagarde called for superior levels of cooperation between US policymakers to ebb the effects of the Fed’s tapering, warning that it could ëspill backí onto the US economy if the issue is left unresolved.