IMF: Global Economy Caught Between Slowdown and Inflation

The global economy is caught between the twin perils of a sharp slowdown in activity and rising inflation, the head of the International Monetary Fund said today.

Dominique Strauss-Kahn, the Fund's newly-appointed managing director said policymakers were grappling with both "ice and fire" and that there was no one-size-fits-all response to the biggest financial crisis since the 1930s.

"The world economy is balanced between these two risks. Too cold and there is a risk of too big a slowdown in growth; too hot and there is the risk of too big an increase in inflation."

Strauss-Kahn said the recession in the United States was affecting growth prospects in the rest of world, and expressed skepticism about the prospect that the developing world would be able to de-couple itself from the problems in the West.

"The risks are tilted to the downside", he said at a press conference held ahead of tomorrow's meeting of G7 finance ministers and central bank governors which will seek to find ways of preventing the losses of Western banks leading to a full-blown global recession.

"These risks are in part centered on the mutually reinforcing credit and housing crisis in the US. But there is also risk aversion, with higher financing costs and a sharp decrease in capital market flows to emerging markets", Strauss-Kahn added.

"Inflation may also be back. It's a key concern. Food prices have increased by 48% since the end of 2006 and that may undermine all the gains achieved in reducing poverty."

Strauss-Kahn, who took control of the Fund six months ago said his organization - set up after the Second World War to prevent a return to the Great Depression of the 1930s - was the right body to co-ordinate the global response to the current crisis.

"The IMF is back", the IMF head said, outlining three key areas where work needed to be done over the coming months. "We have to understand better the linkages between what's happening in the financial sector and what's happening in the real economy. This is not a traditional crisis caused by deficits in current accounts or capital accounts; it is a different sort of crisis."

Strauss-Kahn added that the Fund also needed to improve its surveillance of the global economy - both at the level of individual countries and at a multilateral level. Asked why the Fund had not been able to prevent the sub-prime crisis from erupting, the IMF managing director said his organization's warnings had been ignored. The US, he added, had until recently refused to allow the Fund to stress-test its financial sector.

Finally, Strauss-Kahn said that poor countries in Africa were the most vulnerable to a sharp slowdown, and that the Fund needed to ensure that they were protected from the worst effects of the crisis. He said reform of the Fund to give leading developing countries a bigger say in making decisions would help.

Elizabeth Stuart, of Oxfam, said: "Strauss-Kahn called the reform a big success, but if the goal was to achieve real change then it looks more like a failure. You can barely call this a reform, when 144 countries don't even get an increase of 1% in their voting share.

"The Fund should now move quickly to table a serious reform that isn't just cosmetic; one that gives a real voice to the majority of developing countries."