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News : Global Economy Last Updated: Oct 3, 2014 - 3:47 PM

IMF's Lagarde warns of a world stuck in a "mediocre" era of growth
By Michael Hennigan, Finfacts founder and editor
Oct 3, 2014 - 11:05 AM

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Christine Lagarde, IMF managing director, receives a t-shirt from Georgtown student Kristen Skillman after she delivered a speech on "The Challenges Facing the Global Economy" at Gaston Hall at Georgetown University October 2, 2014 in Washington, DC. IMF Staff Photograph/Stephen Jaffe

Bolder policies can inject a new momentum into the world economy to help it overcome what has been so far a disappointing recovery characterised by a "new mediocre era of growth," Christine Lagarde, IMF managing director, said Thursday.

In a Washington speech heralding next week’s IMF-World Bank Annual Meetings, Lagarde said the IMF’s main job now is to help the global economy shift gears and overcome a brittle and uneven recovery that is beset by risks.

She told an audience at the Georgetown University School of Foreign Service October 2 that the world economy is at an inflection point. “Yes, there is a recovery but, as you all know—and we can all feel it—the level of growth and jobs is simply not good enough.”

The world needs to aim higher and try harder, Lagarde stated. This means “bolder policies to inject a ‘new momentum’ that can overcome this ‘new mediocre’ that clouds the future.”

The Annual Meetings of the IMF and the World Bank Group each year bring together around 10,000 central bankers, ministers of finance and development, private sector executives, and academics to discuss issues of global concern, including the world economic outlook, poverty eradication, economic development, and aid effectiveness.

Weak growth, modest pickup

Six years after the financial crisis began, there is continued weakness in the global economy, and only a modest pickup is foreseen for 2015, Lagarde observed. Among advanced economies, the rebound is expected to be strongest in the United States; modest in Japan; and weakest in the euro area.

Led by Asia, and China in particular, emerging market and developing economies are expected to continue to help drive global activity. For them too, however, it is likely to be at a slower pace than before.

For the low-income developing countries, including sub-Saharan Africa, economic prospects are rising but, as debt builds up in some countries, they need to be watching as well. In the Middle East, the outlook is clouded by difficult economic transitions and by intense social and political strife.

The world economy risks getting stuck with a mediocre level of growth—low growth for a long time, Lagarde said. “If people expect growth potential to be lower tomorrow, they will cut back on investment and consumption today. This dynamic could seriously impede the recovery, especially in advanced economies that are also grappling with high unemployment and low inflation.”

Migration to ‘the shadows’

Lagarde also pointed to concern that financial sector excesses may be building up, especially in advanced economies. Asset valuations are at an all time high; spreads and volatility are at an all time low.

Also worrying is the migration of new market and liquidity risks to the “shadows” of the financial world—part of the less-regulated, nonbank sector, which is growing rapidly in some countries. In addition developments in Ukraine, the Middle East, and in countries affected by the Ebola outbreak represent geopolitical risk.

Generating new momentum

Faced with these events, the world economy can muddle along with sub-par, mediocre growth, Lagarde said. “Or it can aim for a better path where bold policies would accelerate growth, increase employment, and achieve a ‘new momentum.’ ”

A more balanced policy toolkit would use both the demand and supply side of the economy. Monetary policy has provided important support to demand during the crisis, Lagarde observed. Now it needs more support from other policies, specifically

  • Growth- and job-friendly fiscal policies, such as addressing tax evasion, supporting more efficient public spending, and cutting payroll taxes;
  • Structural reforms to raise productivity, competitiveness, and employment through training programs; encouraging women to join the labor force; opening up product and service markets; and reforming energy subsidies; and
  • Boosting efficient public investment in infrastructure, which can be a powerful impetus for growth and jobs.

Still, in many advanced economies, these policies would only go so far unless the flow of credit to the economy is improved. “We need insolvency regimes that can help banks and the private sector effectively deal with their debt burdens—to free up their balance sheets so credit can flow back and grease the wheels of the economy.” Lagarde said.

How to galvanizs the globe

But given “mediocre” growth and the policy “momentum” needed to overcome it, galvanizing global cooperation in such an effort involves multilateralism and the role of the IMF, Lagarde said.

Noting that 2014 marks the IMF’s 70th anniversary, Lagarde said the IMF had been a forum for cooperation throughout its history, including through the financial crisis. She cited examples of global economic cooperation in action during this crisis.

”Perhaps most prominent has been the G-20 nations coming together— including to provide additional resources to the IMF— to bolster confidence and safeguard the global financial system.” She noted that the G-20 recently announced further progress in developing strategies to lift medium-term growth by a collective 2% of GDP by 2018— holding the promise of more growth and jobs.

“Seventy years on, we continue to adapt to fulfill our raison d’être—to safeguard stability by helping countries through economic fallouts, and forging cooperative solutions to global problems. For you and for generations to come,” Lagarde said.

Officials from the 188 members of the IMF and the World Bank are attending the 2014 Annual Meetings. Under the broader umbrella of the formal sessions, there will be a host of meetings of different official groups, including the Group of Twenty advanced economies and emerging markets, the Commonwealth Finance Ministers, and the Group of Seven. There will also be meetings with civil society, academics, and the private sector.

© Copyright 2011 by Finfacts.com

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