The World Bank has given warning that the global economy will fall into a "deflationary spiral" unless urgent action is taken to reduce high levels of excess capacity in industry, Ambrose Evans-Pritchard reported in the UK Telegraph.
Justin Lin, the bank’s chief economist, said factories running idle around world threaten to trap economies in a vicious cycle, risking further spasms of financial stress that require more rescue packages.
"No country can count on currency depreciation and exports as a way out of recession. Unless we deal with excess capacity, it will wreak havoc on all countries,” Lin said.
“There is urgent need for global coordinated fiscal stimulus,” with investments being focused on infrastructure in poor countries that are bearing the brunt of the global crisis, he said.
Lin’s comments came as the Bank of Japan agreed to extend its quantitative easing (QE) policies — mostly the purchase of corporate debt — and warned that business investment is "declining sharply.”
Powerful deflationary headwinds already have created deflation in Japan, leading the International Monetary Fund to say that the Japanese government and central bank should be ready to provide additional stimulus measures should global demand fail to improve enough to support a recovery.
“There are downside risks, particularly if export demand continues to remain weak and unemployment starts to weaken consumption further,” Jim Gordon, the IMF mission chief to Japan, told Bloomberg. “This emphasizes the importance of monetary policy, fiscal policy and financial sector policy to remain supportive with additional measures” if the outlook deteriorates.
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