IMF warns global economy at risk, calls for bold action

Members of the International Monetary and Financial Committee (IMFC) pose for a family portrait during the World Bank/IMF annual meetings in Washington Oct 11, 2014. -- PHOTO: REUTERS
Members of the International Monetary and Financial Committee (IMFC) pose for a family portrait during the World Bank/IMF annual meetings in Washington Oct 11, 2014. -- PHOTO: REUTERS

WASHINGTON (REUTERS) - The International Monetary Fund's member countries on Saturday said bold action was needed to bolster the global economic recovery, and they urged governments to take care not to squelch growth by tightening budgets too drastically.

With Japan's economy floundering, the euro zone at risk of recession and the US recovery too weak to generate a rise in incomes, the IMF's steering committee said focusing on growth was the priority.

"A number of countries face the prospect of low or slowing growth, with unemployment remaining unacceptably high," the International Monetary and Financial Committee said on behalf of the Fund's 188 member countries.

The Fund this week cut its 2014 global growth forecast to 3.3 per cent from 3.4 per cent, the third reduction this year as the prospects for a sustainable recovery from the 2007-2009 global financial crisis have ebbed, despite hefty injections of cash by the world's central banks.

The IMF has flagged Europe's weakness as the top concern, a sentiment echoed by many policymakers, economists and investors gathered in Washington for the Fund's fall meetings, which wrap up on Sunday.

European officials have sought to dispel the gloom, with European Central Bank President Mario Draghi on Saturday talking about a delay, not an end, to the region's recovery.

But efforts to provide more room for France to meet its European Union deficit target looked set to founder on Germany's insistence that the agreement on fiscal rectitude was set in stone.

The IMF panel urged countries to carry out politically tough reforms to labor markets and social security to free up government money to invest in infrastructure to create jobs and lift growth.

It called on central banks to be careful when communicating changes in policy in order to avoid financial market shocks.

While not naming any central banks, the warning appeared aimed at the US Federal Reserve, which will end its quantitative easing policy this month and appears poised to begin raising interest rates around the middle of next year.

The Fed has debated a change to its commitment to holding rates near zero for a "considerable time" at its recent policy meetings, but is stepping gingerly to avoid roiling financial markets.

It wants to avoid a repeat of the "taper tantrum" it touched off last year when it signaled its easing of monetary policy was drawing to a close.