WASHINGTON (AP) — The head of the International Monetary Fund warned Wednesday that leading nations need to embrace bold policy steps to accelerate a still-modest and fragile global economic recovery.
IMF Managing Director Christine Lagarde said that as the world still struggles to emerge from the 2008 financial crisis, economies are under threat from tensions involving Ukraine and Russia to inaction in countries that should be driving growth.
Lagarde said the European Central Bank, for example, should consider lowering interest rates further and using unconventional policies to support growth and fight inflation that is too low.
Her comments came in a speech previewing next week’s meetings of global finance officials in Washington. The 188-nation IMF and its sister lending organization, the World Bank, will hold their spring policy meetings.
In advance of those weekend discussions, finance ministers and central bank governors from the Group of 20 leading economic powers will also meet. The United States will be represented by Treasury Secretary Jacob Lew and Federal Reserve Chair Janet Yellen.
In her remarks, Lagarde noted that the G-20 finance officials in a February meeting in Australia had committed to pursuing policies that would boost global GDP by more than $2 trillion over the coming five years.
Lagarde said if the G-20 countries can do so, it would “place the global economy on a substantially different and better trajectory from today.”
Lagarde said she thinks the global economy is turning the corner from the Great Recession of 2007-2009, but she said overall growth remains too slow and weak.
She warned that the recovery could be put at risk by the wrong policy decisions and by rising geopolitical tensions.
“The situation in Ukraine is one which, if not well managed, could have broader spillover effects,” Lagarde said. “Unless countries come together to take the right kind of policy measures, we could be facing years of slow and sub-par growth, well below the solid, sustainable growth that is needed to create enough jobs and improving living standards in the future.”
She noted that among major industrial countries, growth is strongest in the United States. But she said it would be critical for the Fed to “carefully manage the gradual withdrawal” of its support for growth.
The Fed last month approved a third reduction in its monthly bond purchases, which have been aimed at keeping long-term rates low. This week, Yellen said she thought a key short-term rate would need to remain low for a considerable period to bolster growth.
Lagarde said Europe’s central bank, which handles rate policies for countries that use the euro currency, should further lower rates to make sure extremely low inflation doesn’t hold back economic growth.
She also called on Japan, the world’s third-largest economy, to pursue structural reforms for its economy to help lift the country from two decades of sub-par growth.
In emerging markets, Lagarde said there’s a risk of heightened market volatility associated with the moves by the Fed to cut back on bond purchases. The U.S. effort, by increasing rates in America, could trigger flows of capital out of emerging market countries – something that resulted in a period of market volatility last year.
“Countries with weaker fundamentals … are likely to be more affected,” Lagarde said, urging nations with high budget and trade deficits to work to close those gaps.