IMF Head Warns of Threats to Recovery, Stimulus Still Needed

Speaking on a trip to Asia, which is leading the recovery, Strauss-Kahn identified several key concerns.

- Unemployment is still growing, posing the threat of social unrest and even conflict if not tackled.

- The risk appetite of investors is on the rise. While investors are still not putting capital into advanced economies, large sums are flowing into emerging economies, including Russia, Brazil, and emerging Asia, creating the risk both of asset bubbles or of a damaging abrupt halt in inflows.

- The financial system remains damaged. Japan's experience with its own financial crisis since the late 1990s shows that recovery begins only when companies and banks have cleaned up their balance sheets.

- The timing of unwinding of government stimulus measures is crucial. Although governments are now saddled with high debts from the anti-crisis measures, trying to remove the stimulus measures too quickly could result in a "double dip" recession, with advanced economies in particular falling back into negative growth.

Private demand still weak

Speaking at the Tokyo Foreign Correspondents Club on January 18, Strauss-Kahn said the world was seeing a multispeed recovery, with different countries emerging from the crisis at different rates. He said the IMF would release its quarterly growth forecast shortly showing a faster recovery than expected.

Emerging markets, particularly in Asia, were leading the recovery, but advanced economies were still gaining ground more quickly than anticipated earlier. However, the recovery is fragile and growth, particularly in advanced economies, remains dependent of government stimulus measures.

"Our forecast at the IMF is not a forecast of a double dip. But you never know. It may happen and especially if countries exit too early. If they exit too early and we have a new downturn in growth, then really I don’t know what we can do. A lot of our toolkit in terms of fiscal and monetary policy has been used. If we fall back into negative territory for growth it will be very, very difficult to solve the problem, So, our advice is to be very careful," the Managing Director cautioned.

"The best indicator (for the exit timing) is private demand and employment ... In most countries, growth is still supported by government policies. For as long as you do not have private demand strong enough to offset the need of public policy, you shouldn't exit," he said.

Strauss-Kahn is...