Growing instability in west likely to affect developing economies’ recovery this year
The Observer, Sunday 18 September 2011
Growth across the world’s major economies is expected to be downgraded by the International Monetary Fund at its annual conference this week following a dramatic collapse in consumer and business confidence that has stalled investment and hit government finances.
The IMF will say in its World Economic Outlook that instability in Europe and the US has undermined the prospects for a strong recovery in the west and is expected to hit China, Japan and developing nations over the next six months, according to analysts.
While multinational companies retain healthy balance sheets and banks have steadily rebuilt their finances, a lack of confidence has held back investment and hurt the prospects for growth, the Washington-based thinktank and lender will argue.
Christine Lagarde, the new IMF head, is expected to repeat warnings she made last week that European leaders and the US Congress must act to prevent a further deterioration in growth prospects next year.
Lagarde, the former French finance minister, has said in a thinly veiled warning to UK chancellor George Osborne and Tea Party representatives in the US that it is dangerous to cut spending too quickly because it risked countries falling back into recession and suffering higher unemployment. She also warned that policies favouring the richest elements in society could trigger social unrest and undermine recovery efforts.
Osborne and Bank of England governor Sir Mervyn King will be among the delegates attending the conference in Washington, which runs until next weekend. King was recently at the centre of efforts to prop up ailing European banks with extra liquidity. The Bank of England, US Federal Reserve, Bank of Japan and European Central Bank have agreed to lend billions of dollars to banks unable to access the world’s reserve currency on international money markets.
At the IMF’s spring conference, its former boss Dominique Strauss-Kahn said the strong growth in 2010 had begun to peter out and politicians needed to show strong leadership to rebuild battered economies and create jobs.
However, US and European policymakers have backed austerity measures that many economists argue have undermined confidence. Tensions between delegates who want to promote growth and those who back austerity are expected to run high at the conference.
Labour spokesman Ed Balls said the IMF conference should act as a wake up call for the UK government.
He said in an article for Tribune: “The new head of the IMF, Christine Lagarde, has echoed Labour’s warnings that cutting too quickly will hurt the recovery and jobs and that there is scope for reducing deficits more steadily to support growth… While diplomatically saying in public that the government’s policy remains ‘appropriate’ for now, she warned ministers will need to act if slow growth and high unemployment continues.
“The chancellor’s insistence that there is no alternative to his austerity is sounding less credible by the day. He is politically boxing himself in to an economic plan which is simply not working. The sooner he listens to advice – not just from Labour, but his friends at the likes of the IMF and the OECD – the better.”