The world economy has begun improving but is beset by problems such as high unemployment and rising prices which could fuel crippling trade protectionism and violent social unrest, the head of the International Monetary Fund warned on Tuesday.
“The pre-crisis pattern of global imbalances is re-emerging,” Dominique Strauss-Kahn said in a speech in Singapore.
“Growth in economies with large external deficits, like the U.S., is still being driven by domestic demand. And growth in economies with large external surpluses, like China and Germany, is still being powered by exports,” he said.
“As tensions between countries increase, we could see rising protectionism of trade and of finance. And as tensions within countries increase, we could see rising social and political instability within nations even war.”
Rising food and fuel prices in recent months have already hit poorer countries especially hard and are one of the factors behind massive anti-government protests in Egypt and in Tunisia, whose president was ousted last month.
Concerns about rising debt in developed countries, meanwhile, have increased in recent months, with Standard & Poor’s last week cutting Japan’s credit rating and Moody’s warning it may place a negative outlook on the United States.
In Asia, the worries centre around inflation and analysts say central banks in countries such as Indonesia need to respond faster to contain rising prices.
Strauss-Kahn also said foreign exchange rate adjustments have an important role to play in addressing global economic imbalances and should not be resisted.
“Holding back such adjustment in one country also makes it harder, and more costly, for other countries to let their exchange rate adjust,” he said.
“For this adjustment to take place, time is of the essence, but asking for time only makes sense if there is a significant and regular move in the right direction.”
Strauss-Kahn said the IMF is expecting subdued growth of 2.5 percent for the advanced economies this year as high unemployment and household debt weigh on domestic demand.
“Without jobs and income security, there can be no rebound in domestic demand and ultimately, no sustainable recovery.”
Emerging markets will grow at a faster pace of 6.5 percent, with Asia excluding Japan expanding by 8.5 percent.
“Monetary policy in the advanced economies should remain supportive as long as inflation expectations are well anchored and unemployment stays high,” while Asia may need to do more to address the threat of overheating and a possible hard landing, he said.