Thursday, February 20, 2014

IMF issues warning to G20 on dangers of stimulus withdrawal

The International Monetary Fund says risks of turmoil in emerging markets and deflation in Europe are threatening the global economic recovery.

The warning that "the recovery is still weak" and "significant downside risks remain" comes as as central bankers and finance ministers from the G20 prepare to meet in Sydney.

The latest reality check from the IMF comes as the US Federal Reserve re-affirms its commitment to gradually trimming back its massive economic stimulus program.

Here's my analysis from this morning's edition of AM.

But in a paper prepared to the Sydney meetings, the IMF urged major economies to be cautious about winding back the stimulus.

"Advanced economies should avoid premature withdrawal of monetary accommodation as fiscal balances continue consolidating. Given still large output gaps, very low inflation, and ongoing fiscal consolidation, monetary policy should remain accommodative in advanced economies," the IMF says.

"Given still large output gaps, very low inflation, and ongoing fiscal consolidation, monetary policy should remain accommodative in advanced economies."

The IMF says there is "scope for better cooperation" on undwinding stimulus "including wider central bank discussions of exit plans".

The US Federal Reserve's stimulus program is now US$65 billion per month having fallen from US$85 billion per month late last year.

Federal Reserve chair Janet Yellen appears committed to continuing the stimulus windback after the minutes from the Fed's January meeting have endorsed predictable cuts of US$10 billion unless the US economy's performance surprises.

The IMF says "a new bout of financial volatility" has affected emerging economies as the stimulus windback forces markets to "reassess their fundamentals".

"Markets are showing signs of stabilising recently, although they are still fragile, on the back of actions by key emerging economies to shore up confidence and strengthen their policy commitments," the IMF says.

"This episode, however, underscores vulnerabilities and the challenging environment for many emerging economies. The rapid jump in global risk aversion had also driven down advanced economy equity prices."

The IMF believes its global growth forecast issues in January of 3.75 percent, up from 3 percent in 2013, is achievable "assuming that the impact of the recent volatility is shortlived."

The IMF makes special mention of the euro area -still mired in the sovereign debt crisis - where low inflation and falling inflation forecasts raised the risk of deflation.

"A new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity."

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