Governments must urgently pursue more growth-friendly policies to shore up a weakening global economy beset with risks, the head of the International Monetary Fund has said.
Christine Lagarde also put governments on alert that they should prepare contingency plans in case threats to the fragile global economy materialise.
“The good news is that the recovery continues. We have growth. We are not in a crisis. The not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing,” Lagarde said in a lecture at Goethe University in Frankfurt, Germany.
“We are on alert, not alarm. There has been a loss of growth momentum. However, if policymakers can confront the challenges and act together, the positive effects on global confidence, and the global economy, will be substantial,” she said, according to text of her speech.
The global outlook had weakened over the last six months, made worse by China’s slowdown, lower commodity prices and the prospect of financial tightening for many countries, she said. “Emerging markets have largely driven the recovery and the expectation was that the advanced economies would pick up the growth baton. That has not happened.”
After turbulence on financial markets at the start of the year, the mood had brightened, Lagarde said. That was thanks to fresh support from the European Central Bank, an apparent shift to a slower pace of rate increases by the US Federal Reserve, a recovery in oil prices and lower capital outflows from China.
But “downside risks remain and have probably increased”, she said, including legacies of the financial crisis in advanced economies: high debt, low inflation, low investment, low productivity, and for some, high unemployment. For emerging and developing economies, risks stemmed from lower commodity prices, higher corporate debt and volatile capital flows.
Each of these risks had the potential to spill over into other regions “with greater frequency and force than ever before”, Lagarde said. Those remarks mirrored an IMF warning on Monday that China’s influence on the global financial instability would only grow in coming years. That trend made timely communication and transparency from Beijing all the more important, the Fund said in a pre-released chapter of its global financial stability report.
Lagarde also highlighted greater risks to financial stability and a slowdown in global trade.
She joined other international bodies in calling for governments to take their own actions to shore up economic growth rather than relying on central banks to keep interest rates low and print electronic money. That followed the IMF’s earlier call in February for finance ministers to boost public spending. It also said the UK should ease back on austerity should the economy slow further.
Setting out the IMF’s position ahead of its spring meetings with global policymakers, Lagarde used her Frankfurt speech to call again for more growth-friendly policies such as tax incentives and investment in innovation and infrastructure.
She held up the examples of Japan, which is investing in childcare to help more women work, and India, which cut spending on energy subsidies so it can invest more in social infrastructure such as schools and hospitals. Those countries in a position to spend or cut taxes should do so, she said.
“Of course, countries with high and increasing debt, and elevated sovereign spreads need to pursue further fiscal consolidation. But others may have room for fiscal expansion.
“Countries should also prepare fiscally smart contingency measures that can be implemented promptly should downside risks materialise.”
Lagarde also voiced her concerns that in the face of inequality, terrorism, health epidemics and the refugee crisis, some voters and policymakers were turning to nationalism and protectionism.
The IMF head, who recently made clear she wants Britain to stay in the EU, warned against that trend and called for closer cooperation.
“Frustrations are leading people to question established institutions and international norms,” she said.
“To some, the answer is to look inward, to somehow unwind these linkages, to close borders and retreat into protectionism. As history has told us time and again, this would be a tragic course. The answer to the reality of our interconnected world is not fragmentation. It is cooperation.”
In its latest outlook for the world economy in January the IMF cut its growth forecasts for the next two years and said recovery from the financial crisis could be derailed altogether if key challenges are mishandled. In the update to its World Economic Outlook, it predicted growth of 3.4% this year.
This article was written by Katie Allen, for theguardian.com on Tuesday 5th April 2016 08.30 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010