IMF chief Lagarde warns spending cuts may stall global recovery; Obama kicks off tour in US

Updated On: Aug 16, 2011

International Monetary Fund chief Christine Lagarde has warned governments not to slash spending to avoid sparking a new recession and stalling the feeble economic recovery from the 2008 crisis.

"For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans. At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects. So fiscal adjustment must resolve the conundrum of being neither too fast nor too slow," Ms. Lagarde said in an opinion piece for the Financial Times newspaper.

"What is needed is a dual focus on medium-term consolidation and short-term support for growth and jobs," she advised, "That may sound contradictory, but the two are mutually reinforcing. Decisions on future consolidation, tackling the issues that will bring sustained fiscal improvement, create space in the near term for policies that support growth and jobs."

"The notion that the current global conjuncture leaves us bereft of policy options is wrong," she added, "we have reached a point where actions by all countries, doing what they can, will add up to much more than actions by a few. The priorities are clear: credible, medium-term fiscal consolidation, combined with aggressive exploration of all possible measures that could be effective in supporting short-term growth."

Ms. Lagarde's comments come as advanced countries like the United States and Europe's largest economies face increasing pressure to trim their debt burden. There are also global worries about slowing growth.

In the US, domestic politics and the recent sovereign credit rating downgrade by Standard and Poor's are pushing the government into drastic spending cuts. In France, where there are also worries of an S&P downgrade, the government is preparing spending cuts as well.

But the IMF has encouraged the highly indebted, advanced economies to take a long-term view of deficit reduction and to implement both spending cuts and tax increases.

Analysis: Don’t let fiscal brakes stall global recovery [Financial Times, 15 Aug 2011]
Report: IMF warns spending cuts will stall global recovery [AFP, 16 Aug 2011]

Amidst the financial uncertainty, US President Barack Obama has kicked off a three-day bus tour of the country's Midwest. While the heartland tour is focused on the economy, the trip is being seen as an early move towards the 2012 election campaign.

Speaking at his first stop in Cannon Falls, Minnesota, Mr. Obama criticised the Republican candidates for their opposition to raising taxes as part of a deal to lower the nation’s debt. He also criticised the US Congress for failing to compromise over economic measures.

“You’ve got to send a message to Washington that it’s time for the games to stop. It’s time to put country first,” Mr. Obama said, “Some folks in Congress...would rather see their opponents lose, than America win.”

He said the standoff in Washington over the debt ceiling damaged the economy by creating more uncertainty about the nation’s direction and stalling work on measures to boost jobs and growth.

“We have a political culture that doesn’t seem willing to make the tough choices to move America forward,” Mr. Obama said.

Report and Analysis: Obama kicks off Midwest bus tour with harsh words on the economy[Washington Post, 16 Aug 2011]
Report and Analysis: Obama takes fight to Congress on first stop of bus tour [Chicago Tribune, 15 Aug 2011]

On Monday, Moody's Analytics sharply cut its projections for US growth in the second half to 2.0 percent or less, from a forecast of 3.5 percent just one month ago. Moody's also said there was a one-in-three chance the country could fall back into recession.

But despite the pessimistic prediction, US stocks climbed on Monday for the third day. The Dow Jones Industrial Average gained 213.88 points, countering losses from last week.

“Clearly, just psychologically the market is exhausted after the two and a half weeks we’ve had, and today is more of a response to no calamity over the weekend,” said Jay Suskind, a senior vice president at Duncan-Williams Inc.

“The market took a step back and said, okay we’ve had this correction, let’s let cooler heads prevail.”

Investors were encouraged by Google's US$12.5 billion purchase of of mobile phone manufacturer Motorola on Monday. The deal is Google's biggest acquisition to date. Google says the merger will boost support for the Android operating system.

Report and Analysis: U.S. stocks tally a three-session gain of 7% [MarketWatch, 15 Aug 2011]
Analysis: Google Acquires Motorola Mobility to 'Supercharge' Android [PC Mag, 15 Aug 2011]

Over in Europe, the euro also went up as confidence returned to markets.

The euro gained support after the European Central Bank (ECB) confirmed it bought a record 22 billion euros (U$32 billion) of government bonds last week in an effort to beat off the pressure on under-attack Italy and Spain.

At 2100 GMT the euro was at US$1.4440, up from US$1.4249 late Friday. Meanwhile, the British pound went up to US$1.6387 from US$1.6276.

Report: Euro rises as pressure eases on yen, Swiss franc [Channel NewsAsia, 16 Aug 2011]

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