Global economic recovery 'beset by tensions and strains' warns IMF chief

The head of the world's main economic watchdog warned politicians today that while the recovery was under way, "it is not the recovery we wanted".

Dominique Strauss-Kahn, managing director of the International Monetary Fund, said the recovery was "beset by tensions and strains which could even sow the seeds of the next crisis".

Speaking in Singapore he argued that allowing emerging markets to grab the lion's share of global growth at a time when developed nations are weighed down by debts would create unsustainable imbalances. He also said growing inequalities in both developed and developing nations could trigger social unrest and undermine future growth.

The hard-hitting speech follows hard on the heels of uprisings in Tunisia and Egypt and the threat of further strikes in Greece and Spain..

Strauss-Kahn, a former French finance minister, said: "Without jobs and income security, there can be no rebound in domestic demand – and ultimately, no sustainable recovery."

IMF officials are visiting Greece this week to broker a deal with the country's left-leaning government after figures showed it was struggling to make cuts in line with an IMF and EU bailout.

The IMF has come under strong criticism for forcing debtor nations in need of bailout funds to sack thousands of public sector workers and impose stiff austerity measures, including higher taxes.

But in a pointed message to countries like Britain, Strauss-Kahn said it was up to individual states to limit their budget deficits, but without widening income inequalities or putting up barriers to growth.

"In the advanced economies, the key is to promote growth and job creation. While structural reforms are essential to make these economies more competitive, these reforms are only likely to pay off over time. So what can be done to improve the short term? The most urgent task is to repair and reform the financial sector, to reduce risk and pave the way for healthy credit growth," he said.

A report yesterday by the National Institute for Economic and Social Research found that more than 90% of the 200,000 jobs created in Britain over the last two years were part-time.

The report said employers were reluctant to commit themselves to full-time staff while the economic outlook remained uncertain.

Strauss-Kahn said: "Looking more closely, we see a worrying development: the pre-crisis pattern of global imbalances is re-emerging. Growth in economies with large external deficits, like the US, is still being driven by domestic demand. And growth in economies with large external surpluses, like China and Germany, is still being powered by exports. As the IMF warned in the years leading up to the crisis – and as the G20 has emphasised – these global imbalances put the sustainability of the recovery at risk.

"The 'global growth gap' is also straining the recovery in other ways. Energy prices are rising swiftly, reflecting rapid growth in the emerging economies. Food prices are rising too – though here supply shocks are the main reason – with potentially devastating consequences for low-income countries. Together, these price increases are beginning to feed into headline inflation. Large and volatile capital flows to emerging economies is another challenging development. They are complicating macroeconomic management and in some cases raising concerns about financial stability."

Source: http://www.guardian.co.uk