IMF warns G20 on cutting support too fast

Fri 06 Nov, 2009 16:30

ST ANDREWS, Scotland (Reuters) - The global economic recovery is uneven and the timing of any exit strategies should err towards supporting demand, according to an International Monetary Fund paper prepared for the G20 and seen by Reuters.

In the document prepared for a meeting of Group of 20 finance ministers and central bankers in Scotland, the IMF stressed the fragility of the global recovery, saying it was largely dependent on special government support.

"The pace of recovery is uneven, particularly in advanced economies, with consumer confidence remaining subdued, the waning of temporary fiscal measures such as the cash for clunkers programme in the U.S. and similar programmes elsewhere is slowing production," the paper said.

"This underscores the extent to which the improvement in demand is largely driven by policy stimulus, with a turn in the inventory cycle also playing a part."

Data on Friday showed a surprise jump in the U.S. jobless rate to a 26-1/2-year high of more than 10 percent last month, adding to a hugely varied set of signals on the durability of the recovery there and elsewhere.

In contrast, the European Central Bank on Thursday took a first small step towards easing out of its crisis measures -- ultra-low interest rates and cash injections -- by signalling one-year loans to banks will not be repeated next year.

The IMF is forecasting growth of only 1.3 percent for the world's advanced economies in 2010. The euro zone is seen expanding by just 0.3 percent while the economies of emerging and developing nations are expected to grow by 5.1 percent.

This, it said, showed why policy stimulus was still important.

"The timing of the exit from stimulus should depend on the state of the economy and the financial system and should err on the side of further supporting demand and financial repair," the paper said.

"One of the key lessons from the experience of similar crises (such as the Great Depression and Japan in the 1990s) is that withdrawing policy stimulus too early can be very costly, particularly if the financial system remains vulnerable and prone to adverse shocks."

(Editing by Patrick Graham; G20 newsroom)