“This is a new risk on the horizon and really needs to be watched,” Lagarde said in a discussion about the global economic outlook at the World Economic Forum.
Lagarde also cautioned about the outlook for the 18-country eurozone. Though the eurozone has emerged from its longest-ever recession and many of the bailed-out countries appear headed for modest growth, inflation has fallen sharply. At last count, it was down at 0.8 percent in the year to last month, way below the European Central Bank’s target to keep price rises just below 2 percent.
Many economists have worried that the eurozone may be about to suffer a debilitating bout of deflation, which Japan has experienced for the best part of two decades. Falling prices can hurt an economy as consumers postpone spending in the hope of getting cheaper deals in the future, while businesses fail to innovate and invest.
Lagarde said the IMF thinks there is a 15 percent to 20 percent chance that the eurozone may suffer deflation.
“The risk is that longer term expectations are anchored at a much lower level than it is currently associated with,” Lagarde said.