Global growth will be disappointing in 2016 – IMF’s Lagarde

Global economic growth will be disappointing next year and the outlook for the medium-term has also deteriorated, the head 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, growth in global trade has slowed considerably and a decline in raw material prices is posing problems for economies based on these, while the financial sector in many countries still has weaknesses and financial risks are rising in emerging markets, she said.

“All of that means global growth will be disappointing and uneven in 2016,” Lagarde said, noting that mid-term prospects had also weakened as low productivity, ageing populations and the effects of the global financial crisis dampened growth.

In October the IMF forecast that the world economy would grow by 3.6 percent in 2016.

Lagarde said the start of a normalisation of U.S. monetary policy and China’s shift towards consumption-led growth were “necessary and healthy” changes but needed to be carried out as efficiently and smoothly as possible.

The U.S. Federal Reserve hiked interest rates for the first 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 already having contributed to higher financing costs for some borrowers, including in emerging and developing markets, Lagarde said.

While countries other than highly developed economies were generally better prepared for higher interest rates than previously, she was concerned about their ability to absorb shocks, she said.

Emerging market companies with debt 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 U.S. 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 demand, 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 countries 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 big companies face.

Lagarde also said countries which export raw materials and had scope for fiscal policy measures should use that so they can adjust more smoothly to lower prices. Others should focus on restructuring their budgets in a growth-friendly way such as through tax and energy price reforms and changing their spending priorities, she said. –http://www.reuters.com/article/imf-lagarde-idUSKBN0UD0JI20151230

(Editing by Louise Ireland)