Christine Lagarde, managing director of the International Monetary Fund (IMF), has warned that the prospect of rising interest rates in the US and an economic slowdown in China are contributing to uncertainty and a greater risk of economic vulnerability worldwide.
Writing in the German business daily Handelsblatt, Lagarde admits that she expects global economic growth in 2016 to be “disappointing”. In the article, she notes that growth in global trade has slowed considerably and declining raw material prices is posing problems for resource-based economies based on these, while in many countries weakness persists in the financial sector and financial risks are rising in emerging markets.
Adding to the impact of these factors was low productivity, ageing populations and the effects of the global financial crisis. “All of that means global growth will be disappointing and uneven in 2016,” comments Lagarde. More hopeful trends included the start of normalisation of US monetary policy and China’s shift toward consumption-led growth. These were “necessary and healthy” changes but needed to be carried out as efficiently and smoothly as possible.
The Federal Reserve’s move two weeks ago to hike US interest rates for the first time since 2006 signalled a tentative beginning to a “gradual” tightening cycle, but this also created “potential spillover effects”, writes Lagarde. The prospect of rising interest rates had already contributed to higher financing costs for some borrowers, including those in emerging and developing markets.
She adds that while countries other than highly developed economies were generally better prepared for higher interest rates than they had been in the past; their ability to absorb shocks was a concern. Rising US interest rates and a stronger dollar could lead to firms defaulting on their payments which, in turn threatened to “infect” banks and states.
“Most highly developed economies except the USA and possibly Britain will continue to need loose monetary policy but all countries in this category should comprehensively factor spillover effects into their decision-making,” writes Lagarde.
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