Christine Lagarde, IMF managing director, on Tuesday said the Fund expects global economic growth to weaken and that Asia, while still leading growth, risks slowing further as China's economy adjusts to a new economic model.

The International Monetary Fund chief said in a speech at the University of Indonesia in Jakarta that growth would be below expectations in July because of "two forces: a weaker than expected recovery in advanced economies, and a further slowdown in emerging economies, especially in Latin America."

Last July the Fund cut its forecasts for global growth to 3.3% from 3.5% with a rise of 2.1% in advanced economies forecast and an average 4.2% gain in emerging markets and developing economies.

 

Visiting the world's fourth most populous country, at a time when the currencies of Indonesia and its neighbour Malaysia have fallen to levels against the US dollar that have not been seen since the Asian financial crisis of 1998, Lagarde reassured the students that the her visit had been planned well in advance and did not reflect recent concerns about the economy.

Indonesia's official statistics agency reported last month that gross domestic product (GDP) growth was at a year-on-year 4.67% for the second quarter, its lowest level since 2009.

Eric Sugandi, a Standard Chartered Bank economist, commented that while monthly growth numbers had shown a small bump, there was concern that it represented spending by regional governments for administrative costs rather than public works.

"What makes me worry is the government spending. As of July capital spending in only 11% of the allocation," he said.

Indonesia has been hit by weak commodity prices and a government that has been unable to push through major infrastructure projects.

Lagarde said "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."

On the implication for south-east Asia's biggest economy, Lagarde said Indonesia like several large emerging economies, finds itself caught on the wrong side of several important shifts.

"The first relates to China, one of Indonesia’s main trading partners. As the Chinese economy is adjusting to a new growth model, growth is slowing — but not sharply, and not unexpectedly. 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.

At the same time, commodity prices have come off their peak, and this decline is projected to persist. Both of these factors imply that external demand for Indonesia’s goods is likely to be weaker for some time to come.

There is yet a third shift—unfolding in advanced economies. 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 flow."

The IMF chief said on the labour market in the Muslim country: "I have always believed that a healthy economy is an inclusive economy. One where economic and financial opportunity is provided equally to all segments of society. Yet, by some measures, youth and women remain excluded in Indonesia."

"Think of these three sets of numbers," she said:

"Youth: one in every five young persons is not in education, employment or training.

Women: at about 50%, women’s participation in the labor force is less than two-thirds that of their male counterparts. At the same time, close to 40% of young women (aged 15-24) are not in education or employment.

Yet: by some estimates, a rise in the rate of labor force participation of women from 50% today to 64% by 2030 could potentially add 20 million more skilled workers. This is an economic game changer!

The reasons underlying these unemployment numbers may be several. But a key culprit is the labor market, which remains one of the most rigid in the region. Beyond undermining competitiveness, these rigidities deny the opportunity to more than 60% of workers of finding their way out of low-skilled jobs or the informal sector."

Pic above, Christine Lagarde smiles with Joko Widodo, Indonesian president, during their joint press conference at the Presidential Palace in Jakarta, Indonesia, 1 Sept, 2015.

As the global market turmoil continues, the FT’s Martin Wolf and John Authers discuss the risks of China suffering a sharp slowdown in its economic growth, and the effect this would have on the rest of the world.