Lagarde Says Ukraine Standoff May Cloud Global GDP Outlook

Russia’s standoff with the U.S. and the European Union over Ukraine poses a threat to a global economy that’s already “too weak for comfort,” International Monetary Fund Managing Director Christine Lagarde said.

The rise of geopolitical tensions, along with risks of prolonged ultra-low inflation in advanced economies and of volatility in emerging markets, could cloud the world’s economic outlook, Lagarde said in the text of a speech today in Washington.

“The situation in Ukraine is one which, if not well managed, could have broader spillover implications,” she said. Resolving the tensions there and elsewhere “requires not only good policies, but good politics. Both are essential to enable the global economy to move into a higher gear.”

Russia took over Ukraine’s Crimea Peninsula last month, sparking the worst tensions since the Cold War. The presence of as many as 40,000 soldiers along Ukraine’s eastern frontier is fueling concern that Russia is poised to invade on the pretext of protecting Russian-speaking inhabitants of eastern and southern Ukraine.

The U.S. House of Representatives yesterday passed a bill that would authorize a range of sanctions against Russian officials while extending $1 billion in debt guarantees to Ukraine’s fledgling government.

Economic Fallout

The rift over Crimea is stunting Russia’s economic growth, which unexpectedly accelerated in the fourth quarter before tensions with Ukraine escalated. Rising prices are impeding the central bank’s ability to stimulate a flagging economy, with policy makers forced in March to raise borrowing costs the most since 1998.

The economy will be sapped by capital outflows this year, which are set to overshoot the central bank’s $20 billion forecast, Russian central bank Chairman Elvira Nabiullina said today in Moscow.

“You could argue that the sanction talk has already produced some effect when you look at the capital outflows, when you look at the change of monetary policy,” Lagarde said in response to a question from the audience. “There have been immediate consequences.”

The Washington-based IMF is preparing to lead a $27-billion global bailout for cash-strapped Ukraine, which Lagarde said is “international cooperation in action” as she called for more joint efforts around the world to propel growth.

Growth Forecasts

The IMF expects “modest improvements” for the global economy this year and next after an expansion of about 3 percent last year, she said. The fund is scheduled to publish new global forecasts next week.

“There is the emerging risk of what I call ‘low-flation,’ particularly in the euro area,” which could suppress demand and output, Lagarde said. “More monetary easing, including through unconventional measures, is needed in the” 18-country euro region “to raise the prospects of achieving the European Central Bank’s price-stability objective.”

Lagarde said the IMF’s recent warnings about the risks of deflation in the euro area provoked surprise.

“It’s not so much deflation that we’re concerned about, it’s a regular sustainable long-term low inflation, hence ‘low-flation,’” she said. “We decided to use that in order to catch everybody’s attention.”

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