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15 January 2014

IMF/Lagarde: The global economy in 2014

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"My great hope is that 2014 will prove momentous in another way — the year in which the 'seven weak years', economically speaking, slide into 'seven strong years'", said Lagarde. Although the euro area was turning the corner, growth was still unbalanced and unemployment still high, she observed.

Global outlook and risks

In just a few days, we will be releasing our updated forecasts. While our numbers are still being finalised, I will talk about the main trends as we see them.

  • Momentum strengthened in the latter half of 2013, and should strengthen further in 2014—largely due to improvements in the advanced economies.
  • Yet, global growth is still stuck in low gear. It remains below its potential, which we think is somewhere around 4 per cent. This means that the world could create more jobs before we would need to worry about the global inflation genie coming out of its bottle.
  • Even for the advanced economies, however, the outlook is still subject to significant risks. With inflation running below many central banks’ targets, we see rising risks of deflation, which could prove disastrous for the recovery. If inflation is the genie, then deflation is the ogre that must be fought decisively.
  • During the years of crisis, we have relied on the emerging markets to keep the global economy afloat. Together with the developing countries, they accounted for three-quarters of global growth over the past half decade. However, a growing number of emerging markets are slowing down as the economic cycle turns.
  • We also see risks arising from financial market turbulence and the volatility of capital flows. The reaction to the Fed’s tapering has been calm so far, and this is good news, but there still could be some rough waters ahead.
  • Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven. Moreover, it is not enough to create the jobs for the more than 200 million people around the world who need them.
  • In far too many countries, the benefits of growth are being enjoyed by far too few people. Just to give one example: in the United States, 95 per cent of income gains since 2009 went to the top 1 per cent. This is not a recipe for stability and sustainability.

The policy agenda

This all points to one thing: the need to stay focused on the policies needed for sustainable growth and rewarding jobs, which in the end are needed to make everybody better off...

Now that the global economy looks more stable, the big priority for policymakers in 2014 is to fortify the feeble global recovery and make it sustainable. What does this mean in practice?

For the advanced economies in particular, it means that central banks should return to more conventional monetary policies only when robust growth is firmly rooted. At the same time, countries need to use the room created by unconventional monetary policies to put in place the reforms needed to jumpstart growth and jobs.

Let me go deeper and touch briefly on the different regions.

  • Growth is certainly picking up in the United States, driven by private demand, and to be helped by the loosening of the fiscal corset in the recent budget deal. Still, it will be critical to avoid premature withdrawal of monetary support and to return to an orderly budget process, including by promptly removing the debt ceiling threat.
  • The euro area is turning the corner from recession to recovery, but growth is still unbalanced, and unemployment is still worryingly high. Some countries are doing well, but others are still burdened by high debt and credit constraints. Monetary policy is helping a lot, but could still do more—targeted lending, for example, could help reduce financial fragmentation. The forthcoming review of asset quality and stress tests can also help, but only if they are done in an evenhanded and credible manner. There is also a need to accelerate reforms to boost labor market participation and enhance competitiveness.
  • In Japan, the initial boost from Abenomics is weakening a bit, but temporary fiscal stimulus should help offset the negative effects of the necessary consumption tax increase. The challenge is to agree on medium-term fiscal adjustments and social and economic reforms needed to strengthen growth. Deregulating product and service markets and increasing the participation of women in the workplace would help overcome the ogre of deflation...


There are also many common problems that require a common resolve. Think about the legacy of public and private debt, and about fiscal and current account imbalances. Think about the reforms needed to make the financial system safer and bring it more into the service of the real economy. Think about rising inequality, environmental degradation, and the long-term challenges of climate change.

These are not abstract challenges. It is only by addressing them that we can ensure future prosperity for all and meet the rising aspirations of our global citizens—for jobs, for security, for opportunity, for dignity.



One of our strengths is that we have to look at the bigger picture—how all the moving parts fit together, how what happens in one country affects the wider global economy. This role will surely become more important with time. We need to continue to adapt and to reflect the changing dynamics of the global economy and our membership. That is why we need the continued support of our entire membership.

Full speech


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