IMF chief warns of slower growth after China shockwaves

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The head of the International Monetary Fund has warned that global growth will be weaker than previously expected and that emerging economies should be alert to potential shockwaves from China’s slowdown.

Related: Lagarde warns of Chinese slowdown as markets slide again - live updates

Christine Lagarde also told an audience in Indonesia that Asian economies could continue to lose momentum following recent turmoil on global markets, which have been shaken by fears over China’s economic outlook.

“Overall, we expect global growth to remain moderate and likely weaker than we anticipated last July. This reflects two forces: a weaker than expected recovery in advanced economies, and a further slowdown in emerging economies, especially in Latin America,” Largarde said in a speech at the University of Indonesia in Jakarta.

“Asia as a region is still expected to lead global growth. But even here, the pace is turning out slower than expected – with the risk that it may slow even further given the recent spike in global risk aversion and financial market volatility,” she said.

In July this year, the IMF cut its economic forecasts to project global growth of 3.3% in 2015, down from 3.4% in 2014. The projection compares with a 3.5% forecast made by the IMF back in April this year and 3.4% in July 2014.

Lagarde’s remarks follow a sharp sell-off in China’s stock market amid waning confidence about the country’s economic outlook. Signs of a slowdown in China, the main engine of global growth in recent years, have knocked investor confidence around the world and sparked sharp moves in other stock markets as well as for commodity prices. The FTSE 100 suffered its worst month for three years in August.

The IMF managing director sought to play down fears that China’s authorities are out of policy moves to shore up their economy.

“As the Chinese economy is adjusting to a new growth model, growth is slowing – but not sharply, and not unexpectedly,” Lagarde said.

“The transition to a more market-based economy and the unwinding of risks built up in recent years is complex and could well be somewhat bumpy. That said, the authorities have the policy tools and financial buffers to manage this transition. Other emerging economies, including Indonesia, need to be vigilant to handle potential spillovers from China’s slowdown and tightening of global financial conditions.”

After oil and the prices of metals such as copper hit multi-year lows in recent trading, Lagarde cautioned they could remain under pressure. “Commodity prices have come off their peak, and this decline is projected to persist,” she said.

She also highlighted the potential for an interest rate rise in the US, expected by some economists as soon as this month, to further unsettle emerging markets.

“There are signs that the recovery is firming up in the United States, advancing the prospects of interest rate lift-off. This could pose a risk for emerging economies, including Indonesia, in the form of weaker capital flows, higher interest rates and financial volatility,” said Largarde.

Money had flowed into fast-growing developing countries while yields were at rock-bottom levels in advanced economies but now those funds are flowing back out. The pressure on Asian emerging markets, where currencies such as the Malaysian ringgit have slumped to their lowest in more than a decade, has been exacerbated by the prospect of China’s malaise spreading to its neighbours.

Powered by Guardian.co.ukThis article was written by Katie Allen, for theguardian.com on Tuesday 1st September 2015 12.43 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010

 

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