Global Economy Turning Corner of Great Recession, But Obstacles Ahead

Global economy has broadly stabilized, but new obstacles have emerged

Bolder policy steps needed to take world economy to next level

Absent more ambitious policies, world could fall into medium-term low growth trap

In a speech at the School of Advanced International Studies (SAIS) in Washington ahead of the 2014 IMF-World Bank Spring Meetings, Lagarde added that “a modest and fragile recovery is under way that now needs to change gears toward more rapid and sustainable growth.”

Lagarde pointed to a few broad trends in the global economy, noting that economic activity in the advanced economies, such as United States, euro area, and Japan, is picking up, but at varying speeds.

Growth rates in emerging market countries, while slowing, are among the highest in the world, she said, especially in emerging Asia—a continuing “bright spot” in the global economy. Likewise, growth in sub-Saharan Africa continues at a strong pace. Conditions are more challenging in the Arab countries in transition, Lagarde reported, where growth remains held back by a difficult social and political situation.

Short-term roadblocks

Lagarde cautioned that there are short-term roadblocks on the path to stronger and more durable growth. Old obstacles include finishing the financial sector reform agenda; continuing high debt levels in many countries; and stubbornly high unemployment.

New roadblocks include

• The emerging risk of “low-flation”—a potentially prolonged period of low inflation that can suppress demand and output—and suppress growth and jobs.

• Risk of heightened market volatility associated with the tapering of quantitative easing in the advanced economies, and with a generally less benign external financial climate.

• Geopolitical tensions could cloud the global economic outlook. The situation in Ukraine is one which, if not appropriately managed, could have broader spillover implications.

Lagarde said the costs of continued sluggish growth are high: modest income gains and gradual reductions in unemployment. “The risk is that without sufficient...