IMF head Christine Lagarde warns of deflation risks

Christine Lagarde Christine Lagarde was speaking at the National Press Club, in Washington

Related Stories

The head of the International Monetary Fund has warned about the risks to global economic recovery of deflation.

Christine Lagarde said that "optimism is in the air" about growth, but the recovery is still "fragile".

"If inflation is the genie, then deflation is the ogre that must be fought decisively," she said in a speech in Washington.

Earlier, the World Bank said that the global economy was at a "turning point" but "remained vulnerable".

"We see rising risks of deflation, which could prove disastrous for the recovery," Ms Lagarde said at the National Press.

There has, for example, been growing debate about whether deflation might take hold in the eurozone, where inflation remains persistently below the European Central Bank's target.

Deflation can reduce personal consumption as people wait for prices to fall further, and discourage investment because it can raise the real cost of borrowing.

Ms Lagarde also warned about the volatility that could accompany the US Federal Reserve's gradual withdrawal of monetary stimulus.

"Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven," she said.

Also on Wednesday, the World Bank said in its annual report that richer countries appeared to be "finally turning a corner" after the financial crisis.

The World Bank's Andrew Burns forecasts stronger growth for 2014

That is expected to support stronger growth in developing economies.

But it warned growth prospects "remained vulnerable" to the impact of the withdrawal of economic stimulus measures in the US.

'Crisis risks'

The US Federal Reserve has already begun to wind down its monthly bond-buying programme, previously set at $85bn (£52bn) a month.

There is concern this could push up global interest rates, which could affect the flow of money in and out of developing countries and lead to more volatile international financial markets.

The World Bank warned that some developing countries "could face crisis risks" if the unwinding of stimulus measures was accompanied by market volatility.

"Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery," said World Bank group president Jim Yong Kim.

Analysis

The World Bank says that as the Federal Reserve cuts back its efforts to stimulate the US economy it's likely to push up global interest rates which could hit developing economies.

A World Bank economist acknowledged in a BBC interview that Brazil, Turkey, India and Indonesia are among the countries that could be vulnerable.

However he also noted that the first concrete steps taken by the Federal Reserve to cut back its programme of buying financial assets last month did not severely disturb the markets.

"The performance of advanced economies is gaining momentum, and this should support stronger growth in developing countries in the months ahead. Still, to accelerate poverty reduction, developing nations will need to adopt structural reforms that promote job creation, strengthen financial systems, and shore up social safety nets."

The bank forecasts that global GDP will grow by 3.2% this year, up from 2.4% in 2013, with much of the pick-up coming from developed economies.

Developing nations will grow by 5.3% this year, up from 4.8% in 2013.

In an interview with BBC economics correspondent Andrew Walker, World Bank economist Andrew Burns acknowledged that Brazil, Turkey, India and Indonesia were among the countries that could be vulnerable to the impact of US stimulus withdrawal.

However he also noted that the first concrete steps taken by the Federal Reserve to cut back its programme of buying financial assets last month did not severely disturb the markets.

More on This Story

Related Stories

The BBC is not responsible for the content of external Internet sites

More Business stories

RSS

Business Live

  1.  
    06:28: Radio 5 live

    The Bank of England's Martin Weale has been telling Wake Up to Money why he's been voting for interest rates to move off the record low of 0.5%. "It isn't only that unemployment has been falling - at least until recently extremely rapidly. It's also that when I go and visit businesses throughout the country I find they're talking of pay increases in a way quite different from what I was hearing early in the year certainly this time last year."

     
  2.  
    06:16: Markets Radio 5 live

    Brenda Kelly from IG is Wake Up to Money's markets guest. They are talking about the falling oil prices. "A lot of it is down to a glut of supply and Saudi Arabia wants to keep market share," she says. Saudi's breakeven price is only a few dollars per barrel.

     
  3.  
    06:10: Christmas spending Radio 5 live

    Mark Barnett, UK & Ireland president of Mastercard, is on Wake Up to Money, talking about Christmas shopping habits. What else? People have returned to luxury goods, he said. Holidays and furniture are down a little bit though.

     
  4.  
    06:04: Hacking 2.0
    Kim Jong

    The global cyberwar that dominated headlines last week shows no signs of abating. Hackers have infiltrated South Korea's nuclear power provider, and posted schematics of nuclear reactors and private personal records online. It's not clear whether the same group that attacked Sony Pictures is responsible.

     
  5.  
    06:00: Howard Mustoe Business reporter

    Morning! Get in touch. Tell us what you think. Email bizlivepage@bbc.co.uk or on Twitter @BBCBusiness

     
  6.  
    06:00: Joe Miller Business Reporter

    Good morning, and festive greetings all round. In a week when the business world is winding down for Christmas, we'll bring you all the news that's sneaking in the back door, and much more besides.

     

Features

From BBC Capital

Programmes

  • (File photo) A man dressed as Father Christmas with a sleigh and a reindeer Click Watch

    A website which tracks Father Christmas, plus other sites and apps to keep you entertained

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.