HONG KONG (AFX) - IMF managing director Horst Koehler said a recovery from the U.S.-led global slowdown will set in later this year provided "vigorous" policy action is taken.
Koehler said at an Institute for International Finance dinner that the IMF's "best guess" was that the slowdown would be shortlived, with recovery beginning later this year and gathering strength in 2002. "What is important is vigorous policy action to ensure this outcome materialises," he said.
Koehler said Europe must press ahead with more ambitious economic structural reforms to ensure stronger growth, adding the effects of the U.S. slowdown on growth in Europe had been stronger than expected. "I welcome the recent reduction in interest rates by the European Central Bank and I am sure that the ECB is now more vigilant than ever," Koehler said.
"But we are also aware that the key to stronger European growth is not monetary policy but the adoption of more ambitious structural reforms, particularly in labour and product markets and tax and pension systems," he said.
Koehler also praised Japan's move to fight deflation through a loosening of monetary policy and the recognition by new Prime Minister Junichiro Koizumi of the need to accelerate banking and corporate reforms.
"To further underpin world economic growth we need leadership by the advanced countries in resisting protectionist pressures and supporting a new round of multilateral trade negotiations," he added. Emerging markets in Asia and elsewhere are also being tested by the global slowdown but Koehler said he believes "Asia will weather the storm."
"In most Asian countries the risk of a new crisis has been greatly reduced through stronger macroeconomic fundamentals and the adoption of more flexible exchange rate policies," he said. However, Asian countries have a mixed record in financial sector reform, improving governance and strengthening the investment climate, he said, adding these remain sources of vulnerability in some countries.
Koehler said the IMF is giving priority in coming months to building its ability to detect potential crises early. "What is crucial is that we sharpen our ability to identify emerging problems and bring about early and preemptive policy action in member countries," he said.
"In the process, we will need to take care that our warnings about potential crises do not become self-fulfilling prophecies."