IMF predicts higher global growth but warns of risks

Reuters reported that the International Monetary Fund expects global growth to pick up this year, though deflation is a rising risk as long as economic growth stays below what policymakers believe is optimal.

Ms Christine Lagarde MD of IMF expressed concern about price growth remaining below the target of many central banks, which could hurt the nascent recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively.

An inflation rate that is well below the 2% targeted by some of the world’s major central banks carries risks in the longer term because it can deflate wages and demand, depressing the economy.

In the US, Federal Reserve officials are stumped about why inflation has stayed so low for so long, and some worry it could be a sign the US recovery is not as strong as some other economic data might indicate.

However, disappointing data on US non farm payrolls last week offered a cautionary note after a string of data from consumer spending and trade to industrial production had suggested the US economy ended 2013 on strong footing and was positioned to strengthen further this year.

While December’s unemployment rate fell 0.3 percentage point to 6.7%, its lowest level since October 2008, the decline mostly reflected people leaving the labour force.

Ms Lagarde said that central banks should be careful to withdraw monetary stimulus only once the economy is clearly on a firm footing. The so called taper of the Fed’s bond buying was not expected to roil markets as long as it was gradual. We don’t anticipate massive, heavy and serious consequences.

However, more rapid adjustments could cause sharp market gyrations and volatile capital flows, which would hit some emerging markets in particular. Developing economies, which had been the engine of the global recovery after the 2008 financial crisis, are now slowing due to cyclical factors.