Krugman warns of scary future due to spectre of deflation

   He said he wanted the US Federal Reserve to think twice before raising its key interest rate, a move which he expects the Fed to take this year.
   Though the US economy is performing better than the economies of Japan and Europe, it could be affected by problems in these countries, he warned.
   Krugman said he was pessimistic about the future of the euro-zone economy, for which he currently believes there is no recovery in sight.
   However, the Princeton University professor of economics and international affairs expressed his support for maintaining the euro project, since breaking it up would cost the European Union dearly, particularly in terms of its goals of promoting democracy and prosperity.
   He said he expected the European Central Bank to cut its policy rate and adopt a quantitative-easing policy by injecting money into the system. 
   Meanwhile, he called for a faster stimulus package in Japan, whose central bank he said should forget about focusing on a prudential policy.
   The economist previously advocated the Japanese government to delay its planned sales-tax hike, as a prior increase had resulted in a significant negative impact on the economy.
   He also warned that the risk of deflation could harm the Chinese economy at a time when Beijing was trying to adjust to more consumption-driven growth from export- and investment-oriented expansion. 
   “The world is scared [about the spectre of deflation],” he told the forum.
   The Chinese government needs to invest more in social protection, such as healthcare, which would enable its citizens to spend more on consumption, he said, adding that he did not think the government could maintain the country’s investment at the current rate.
   China is also facing the problem of an ageing population due to its one-child policy, with the country now looking more like Japan in this respect, he said.
   Japan and Europe both face the serious issue of an ageing population, which weakens the economy as investors have little reason to invest for the future. Moreover, the Japanese population is now shrinking, he added.
   He told the forum that he did not, however, agree with many countries trying to cut debt in order to achieve fiscal prudence.
   Debt is another form of income, he said, and debt deleveraging has contributed to an economic slowdown in many European countries. 
  
   IMF’s dimmer outlook

   Meanwhile, falling oil prices, divergences of economic growth among major economies, and a stronger US dollar that has weakened emerging-market currencies – especially those of commodity exporters – are some of the key developments which have shaped the International Monetary Fund’s current view of the global outlook.
   They have contributed to the IMF’s decision this week to slash its forecast for the global economy this year from its October projection of 3.8 per cent to the current 3.5 per cent.
   The IMF’s latest “World Economic Outlook” report comes after the World Bank Group released its bi-annual report last week, with the bank also cutting its global growth forecast from its June prediction of 3.4 per cent to the current 3 per cent for this year.
   The World Bank cited disappointing growth outturns in the euro area, Japan, parts of emerging Europe (especially Russia) and Latin America.
   The IMF’s growth forecasts for China, Russia, the euro area and Japan have all been revised down in its latest report.
   The fund is also expecting weaker activity in some major oil exporters because of the sharp drop in oil prices, while shifts in sentiment and volatility in global financial markets – especially in emerging-market economies, where lower oil prices have introduced external and balance-sheet vulnerabilities in oil exporters – are other downside risks to the global economy.
   Stagnation and low inflation are still concerns in the euro area and Japan, it said.
   The US economy, meanwhile, has “rebounded ahead of expectations” and the IMF expects it to expand by 3.6 per cent this year, which is better than its previous prediction in October of 3.1 per cent.