Cooperative action by countries can increase global output by two per cent over the next five years, the head of the International Monetary Fund has said.

In a key note address to the International Economic Forum of the Americas in Montreal yesterday, IMF Managing Director, Christine Lagarde, had called for co-operation among key global players.

“Why is cooperation important? As any hockey team can attest, team work is key. If countries implement the right set of policies for their domestic welfare, the whole world will get to benefit,” she said.

“Indeed, in the context of the G20 meeting in Sydney, our estimates suggest that cooperative action can increase global output by two per cent over the next five years. Reaping these benefits lies in working together in laying the foundations for the next era of growth,” Lagarde said.

Across the world, she said, many countries are trying to rebalance their economies towards more stable sources of growth — be it China, trying to rebalance away from investment towards consumption, or Germany trying to boost domestic sources of demand.

Lagarde said the global economy is turning the corner on the Great Recession, and the overall prospects are improving.

“Economic activity is gaining momentum, and despite a bumpy start earlier in the year, we expect an expansion of 3.6 per cent in 2014 and 3.9 per cent in 2015,” she said.

Advanced economies are finally strengthening, with growth expected to be about 2.3 per cent this year, even though their recovery remains uneven.

Emerging market and developing economies will continue to provide the bulk of global growth, albeit at a slower pace than before. “We still expect them to grow at a healthy clip of five per cent this year and 5.4 per cent next year,’’ she added.

Emerging risk of ‘low-flation’

“This is good news. Even so, we can see three major concerns clouding the horizon. First, in the advanced economies, there is the emerging risk of ‘low-flation,’ particularly in the Euro Area,” she said.

“A prolonged period of low inflation can derail the incipient recovery — and suppress growth and jobs. The recent proactive stance by the ECB is very welcome, and we are encouraged that it is willing to do more if necessary,” the IMF chief said.

Market volatility, financial instability

“Second, in emerging market economies, there is the risk of renewed market volatility and rising financial instability associated with monetary normalization in the US Good communication among central banks is essential; and a continued strong focus on policy fundamentals in emerging markets also remains key,” she said.

Geopolitical tensions

“Third risk: in various places around the world, geopolitical tensions are rising. If not well managed, for example, the situation in Ukraine could have broader spill-over implications. Recent elections, however, provide a window of opportunity to make progress on essential reforms, including with Canada’s welcome financial support,” Lagarde said.

“Beyond these concerns, of course, we still need to fix problems that have been with us for some time during the crisis: unacceptably high unemployment, especially among young people; high levels of debt in many countries; and the need to complete the financial reform agenda,” she said.

Structural reforms

“Many countries also need to implement structural reforms to boost growth — particularly in labour and service markets and greater infrastructure investment. While there has been some progress in each of these areas, a lot of work remains to be done,” she added.

“So my bottom line: global activity is gaining momentum, but the recovery remains fragile and uneven, and faces the twin enemies of complacency and fatigue,” Lagarde said.

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