Emerging markets need to guard against asset bubbles: Christine Lagarde

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World economy is not yet flying on all engines and is likely to remain underpowered next year as well, says IMF chief. Reuters World economy is not yet flying on all engines and is likely to remain underpowered next year as well, says IMF chief. Reuters
SummaryWorld economy is not yet flying on all engines and is likely to remain underpowered next year as well, says Christine Lagarde.

Policymakers in emerging markets, which are facing new policy challenges, should be wary of financial excess and guard against possible asset bubbles, IMF Chief Christine Lagarde said today.

Striking a cautious note, Lagarde said that even though recovery has gained momentum, "the world economy is not yet flying on all engines and is likely to remain underpowered next year as well".

Referring to 2013, she said that last year global economy "remained suspended between the poles of hope and uncertainty".

"Over the past half-decade, the emerging markets have been in the vanguard of economic recovery: together with developing countries, they have accounted for three-quarters of global GDP growth.

"But these economies' momentum slowed in 2013, as uncertainty about the timing of monetary-policy normalisation in the US coincided with doubts about the sustainability of their growth path," Lagarde said in a blog on WEF website.

According to her, the worst fears have faded but emerging economies face new policy challenges.

"In responding to slower demand, policymakers must be wary of financial excess, especially in the form of asset bubbles or rising debt.

"They should also focus on strengthening financial regulation, in order to manage credit cycles and capital flows more effectively, and on reestablishing fiscal room for manoeuvre," the blog said.

Going by latest IMF forecast, the global economy is projected to grow 3.6 per cent this year but the level is below the potential of around 4 per cent.

"In other words, the world could still generate considerably more jobs without fuelling inflationary pressure," Lagarde wrote in the blog.

Appreciating the efforts of global policymakers, Lagarde said it has helped the world economy avoid the worst-case scenario (Great Depression II) over the past five years.

"But the time has come to push further, including by using the room created by unconventional monetary policies to implement structural reforms that can jump-start growth and create jobs," she said.

According to WEF, all opinions expressed are those of the author and the blog is an independent and neutral platform dedicated to generating debate around the key topics that shape global, regional and industry agendas.

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