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Afghanistan: Global growth will be disappointing in 2016: IMF's Lagarde

2016/01/02

World economic increase will be disappointing next year and the outlook for the medium-term has as well deteriorated, the chief of the International Monetary Fund said in a guest article for German newspaper Handelsblatt published on Wednesday.

IMF Managing Director Christine Lagarde said the prospect of rising interest rates in the United States and an economic slowdown in China were contributing to uncertainty and a higher risk of economic vulnerability worldwide.

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

"All of that means world increase will be disappointing and uneven in 2016," Lagarde said, noting that mid-term prospects had as well weakened as low productivity, ageing populations and the effects of the world financial crisis dampened increase In October the IMF estimate that the world economy would grow by 3.6 % in 2016.

Lagarde said the start of a normalization of US monetary policy and China's shift toward consumption-led increase were "necessary and healthy" changes but needed to be carried out as efficiently and smoothly as possible.

The US Federal Reserve hiked interest rates for the initial time in nearly a decade this month and made clear that was a tentative beginning to a "gradual" tightening cycle.

There are "potential spillover effects", with the prospect of increasing interest rates there by presently having contributed to higher financing costs for some borrowers, inclunding in emerging and developing markets, Lagarde said. While nations other than highly developed economies were generally better prepared for higher interest rates than before, she was concerned about their ability to absorb shocks, she said.

Emerging market companies with deficit in dollars and revenue in sinking local currencies could struggle as the Fed begins what is expected to be a series of interest rate increases.

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

"Most highly developed economies except the USA and possibly Britain will continue to need loose monetary policy but all nations in this category should comprehensively factor spillover effects into their decision-making," Lagarde said. She said emerging markets needed to improve monitoring of the foreign exchange risks their large companies face.

Lagarde as well said nations which export raw materials and had scope for fiscal policy measures should use that so they can adjust additional smoothly to lower prices. Others should focus on restructuring their budgets in a increase-friendly way such as through tax and energy price reforms and changing their spending priorities, she said.

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