Global growth to disappoint: Christine Lagarde

Global economic growth will be disappointing next year and outlook for the medium-term has also deteriorated, the head of the International Monetary Fund has said.

IMF managing director Christine Lagarde, in a guest article for German newspaper Handelsblatt, said the prospect of rising interest rates in the US and an economic slowdown in China were contributing to uncertainty and a higher risk of economic vulnerability worldwide.

Added to that, growth in global trade has slowed considerably and a decline in raw material prices is posing problems for economies based on these, while the financial sector in many countries still has weaknesses and financial risks are rising in emerging markets, she said.

“All of that means global growth will be disappointing and uneven in 2016,” Ms Lagarde said, noting that mid-term prospects had also weakened as low productivity, ageing populations, and the aftereffects of the global financial crisis dampened growth.

In October, the IMF forecast that the world economy would grow by 3.6% in 2016.

Ms Lagarde said the start of a normalisation of US monetary policy and China’s shift towards consumption-led growth were “necessary and healthy” changes but needed to be carried out as efficiently and smoothly as possible.

This month, the US Federal Reserve hiked interest rates for the first time in nearly a decade and made clear that it was a tentative beginning to a “gradual” tightening cycle.

There are “potential spill-over effects”, with the prospect of increasing interest rates there already having contributed to higher financing costs for some borrowers, including in emerging and developing markets, Ms Lagarde said.

While countries other than highly developed economies were generally better prepared for higher interest rates than previously, she was concerned about their ability to absorb shocks.

Emerging market companies with debt in dollars and revenue in sinking local currencies could struggle as the Fed begins an expected series of rate rises.

Ms Lagarde warned that rising US interest rates and a stronger dollar could lead to companies defaulting on their payments and that this could “infect” banks and states.

However, she said the risks associated with these changes could be overcome by supporting demand, maintaining financial stability and reforming structures.

“Most highly developed economies, except the US and possibly Britain, will continue to need loose monetary policy but all countries in this category should comprehensively factor spill-over effects into their decision-making,” she said, adding that emerging markets needed to monitor the foreign exchange risks their big companies face.

Ms Lagarde also said countries which export raw materials and had scope for fiscal policy measures should use that so they can adjust more smoothly to lower prices.

Others should focus on restructuring their budgets in a growth-friendly way, she said.