IMF: RECOVERY IS SURPRISING TO THE UPSIDE

European stocks rallied on the day after bullish comments by IMF chief Strauss-Kahn. At a speech in Japan, Dominque Strauss-Kahn noted that the global economy is recovering faster than expected, but remains largely dependent on government stimulus. In his speech the IMF leader noted 4 key risks to the recovery:

Unemployment is still growing, posing the threat of social unrest and even conflict if not tackled.

The risk appetite of investors is on the rise. While investors are still not putting capital into advanced economies, large sums are flowing into emerging economies, including Russia, Brazil, and emerging Asia, creating the risk both of asset bubbles or of a damaging abrupt halt in inflows.

The financial system remains damaged. Japan’s experience with its own financial crisis since the late 1990s shows that recovery begins only when companies and banks have cleaned up their balance sheets.

The timing of unwinding of government stimulus measures is crucial. Although governments are now saddled with high debts from the anti-crisis measures, trying to remove the stimulus measures too quickly could result in a “double dip” recession, with advanced economies in particular falling back into negative growth.

Although he notes that the IMF does not expect a double dip recession, he says the potential is substantially higher if governments do not maintain their stimulus:

“Our forecast at the IMF is not a forecast of a double dip. But you never know. It may happen and especially if countries exit too early. If they exit too early and we have a new downturn in growth, then really I don’t know what we can do. A lot of our toolkit in terms of fiscal and monetary policy has been used. If we fall back into negative territory for growth it will be very, very difficult to solve the problem, So, our advice is to be very careful.”

The implications here are clear. Expect governments to maintain their accommodative stances for some time to come.

You can see more on Strauss-Kahn’s comments here:

Cullen Roche

Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.

He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.