Lagarde warns over ‘3-speed’ world economic recovery

The world economy looks better than it did half a year ago, but uneven pace of growth among regions have brought about a “three-speed” global economy, said International Monetary Fund chief Christine Lagarde.

“After a particularly volatile period, financial conditions are showing signs of improvement. Thanks to the actions of policymakers, the economic world no longer looks quite as dangerous as it did six months ago,” Christine Lagarde, managing director of the IMF, said Wednesday in a prepared speech for delivery at the Economic Club of New York, reported Xinhua.

“Yet we do not expect global growth to be much higher this year than last. We are seeing new risks as well as old risks,” she noted. “In far too many countries, improvements in financial markets have not translated into improvements in the real economy – and in the lives of people.”

In the curtain-raising speech for the upcoming Spring meetings of the IMF and the World Bank, Lagarde highlighted the emergence of a “three-speed” global economy – some countries are doing well, some are on the mend, and some still have distance to go.

For the “first speed” group including emerging economies, Lagarde said they are rebounding after a slight slowdown last year. The growth could be consolidated by rebuilding fiscal buffers and adopting appropriate macroprudential polices.

She advised policymakers to be alert on some warning signs. Corporations in emerging markets are taking on more debt and foreign exchange exposure. Over the past five years, foreign currency borrowing by firms in emerging markets has risen by about 50 percent. Over the past year, bank credit has increased by 13 percent in Latin America and 11 percent in Asia.

Lagarde said the US, which is in the “second speed” group, has made rapid and substantial progress in repairing its financial system, as well as the household debt situation.

However, “an outstanding issue is that public finances appear unbalanced”, she warned. “Adjustment is too aggressive in the short term, and too timid in the medium term. This adds to uncertainty and casts a shadow on the recovery.”

She suggested that a credible, medium-term roadmap which combines spending cuts with additional revenues should be put in place to bring down the debt.

Countries that still had work to do included the euro area and Japan, said Lagarde. In the euro area, the priority is to clean up the troubled banking system. For Japan, the main challenge is to “break free of the deflation trap and restore economic vitality”.