Lagarde calls for urgent G7 action on global recovery

Head of the International Monetary Fund Christine Lagarde has called for the G7 leaders to take urgent action at their upcoming meeting to safeguard the global economic recovery.

At the Royal Institute for International Affairs, on her way to a G7 leaders meeting to be held in Marseille this weekend, Lagarde set out specific recommendations to enable the recovery, including advice on fiscal consolidation.

"Countries must act now, and act boldly, to steer their economies through this dangerous new phase of the recovery," she said.

Lagarde said the world is suffering from a crisis of confidence as the outlook for economies remains weak and concerns mount over the health of sovereigns and banks.

"All this is happening at a time when the scope for policy action is considerably narrower than when the crisis first erupted. But while the policy options may be fewer, there is a path to recovery," she added.

Lagarde identified the principal challenges, one of which isg that the necessary hand-off from public to private demand has not taken place. Weak growth is creating a ripple effect across various sectors, she said.

She also highlighted concerns some emerging economies are growing too fast and there has been little progress in shifting from external to domestic demand.

Lagarde repeatedly called for policymakers to act "with conviction and urgency", but warned advanced economies must not consolidate too quickly for fear of hurting the recovery and worsening job prospects.

"Monetary policy should remain highly accommodative as the risk of recession outweighs the risk of inflation," she said.

"This is particularly true since inflation expectations are well anchored in most economies, and commodity price pressures are waning.

"So policymakers should stand ready, as needed, to take more action to support the recovery-including through unconventional measures."

Lagarde welcomed US President Barack Obama's decision to support growth and job creation in the short term, as announced last night.

"As the President also emphasised, it remains critical for the United States to clarify its medium-term plan to put public debt on a more sustainable path, and we look forward to the proposed consolidation plan to be announced in the coming days," she said.

On the eurozone, she urged for more fiscal action and more clarity about the availability of sovereign financing, pushing for eurozone leaders implement their groundbreaking 21 July commitments (involving the second Greek loan package) as soon as possible.

Once these commitments are fulfilled, Lagarde expects to see a decline in sovereign risk, she said, removing some of the uncertainty weighing on European banks.

Finally, turning to the UK, she urged strong fiscal consolidation to restore debt sustainability but also cautioned on downside risks and warned policymakers must try to be nimble.

"UK financial stability is a global public good, requiring the highest quality regulation and supervision.

"Recognising this, the UK authorities' approach to stringent capital and liquidity regulations, including the emphasis on building buffers ahead of Basel III requirements, and intensive supervision is hence both commendable and essential."