IMF chief warns of a 'lost decade' for global economy

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Media captionChristine Lagarde: "The world runs the risk of a downward spiral of uncertainty"

The head of the International Monetary Fund, Christine Lagarde, has warned that the global economy is at risk of being plunged into a "lost decade".

Ms Lagarde said the ongoing debt crisis in Europe has resulted in an uncertain outlook for the global economy.

The IMF chief added that whilst efforts to solve the crisis were heading in the right direction, more needed to be done to restore confidence.

Speaking in China, Ms Lagarde called upon Beijing to rebalance its economy.

"Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of downward spiral of uncertainty, financial instability and potential collapse of global demand," she said.

"We could run the risk of what some commentators are already calling the lost decade," Ms Lagarde added.

'Clouds on the horizon'

Ms Lagarde's comments come amid fears that the debt crisis in some peripheral countries may be spreading to some of the euro area's biggest economies.

On Tuesday, Italy's cost of borrowing hit the highest level since the euro was founded in 1999. The yield on Italian 10-year government bonds rose to 6.77%, raising concerns about its capacity to service its debts.

Many investors believe that Italy may have to bailed out just like Greece, the Irish Republic and Portugal.

The fear is that as the eurozone debt crisis spreads, it will have a big impact on the international economy.

At the same time, there have been concerns about a slowdown in the US as it struggles to boost growth and tackle stubbornly high rates of unemployment.

Ms Lagarde said the combination of these factors were a big threat to global growth.

"There are clearly clouds on the horizon," she said. "Clouds on the horizon particularly in the advanced economies and particularly so in the European Union and the US."

Domino effect

Image caption The eurozone debt crisis has caused huge volatility in global stock markets

While the US and eurozone economies have been struggling with their individual issues, Asian countries led by China have been growing robustly in recent years.

However, there is a realisation that in a globalised economy, Asia is not immune from troubles in the rest of the world.

The US and the eurozone are the world's two largest economic regions and are the biggest markets for Asian goods.

But with their economies in the doldrums consumer demand for Asian goods has slowed. With exports being so vital to countries like China and Japan, that could really hurt growth.

"Weakness in the export sector will be the main hindrance to economic growth in the coming quarters," Jing Ulrich of JP Morgan warned in a report.

Data out earlier this month showed that China's new orders index fell to 50.5 in October from 51.3 the month before.

Policymakers and analysts have warned that a slowdown in China and other emerging Asian economies coupled with troubles in the developed economies will be detrimental to global growth.

Ms Lagarde called upon China to alter its export-led growth policies and boost domestic demand to rebalance its economy and sustain long term growth.

She said that Beijing needed to allow its currency to appreciate further in order to boost demand at home.