( London Post) A combination of rising interest rates in the US and weakening expansion in China is contributing to uncertainty and a greater risk of economic volatility across the world, says IMF Managing Director Christine Lagarde.
Even seven years after the collapse of the US investment bank Lehman Brothers, the IMF chief said, the financial sector in many countries still had weaknesses and in many emerging economies the financial risks were increasing.
“All of that means global growth will be disappointing and uneven in 2016,” she said.
Lagarde also struck a pessimistic note over medium-term growth prospects, citing low productivity, aging populations and the effects of the global financial crisis.
Some developed countries, particularly in Europe, were afflicted by high debt levels, low investment and weak banking sectors, she said. At the same time, following years of credit and investment boom, many emerging markets were under pressure to reform their economies to better adapt to new monetary conditions, according to Lagarde.
The IMF boss said the start of normalization of US monetary policy and China’s restructuring of its economy towards consumption-led growth were “necessary and healthy” changes but needed to be carried out as efficiently and smoothly as possible.
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Earlier this month, the US Federal Reserve raised its benchmark interest rates for the first time in nearly a decade and announced that it was a tentative beginning to a “gradual” tightening cycle.
Lagarde, however, raised concerns about “potential spillover effects,” underlining that the prospect of rising US rates had already led to higher financing costs for some borrowers, including in emerging and developing countries.
She added that while countries other than highly developed economies were generally better prepared for higher interest rates than they had been in the past, she was concerned about their ability to absorb shocks.
“Most highly developed economies, except the USA and possibly Britain, will continue to need a loose monetary policy, but all countries in this category should comprehensively factor spillover effects into their decision-making,” Lagarde said.
She warned that rising interest rates and a stronger US dollar could lead to firms defaulting on their debts and that this could then “infect” banks and states.
Referring to the eurozone, Lagarde said the bloc could improve its growth prospects by tackling the issue of bad loans amounting to about 900 billion euros ($985 billion). “This would allow banks to expand lending to businesses and households and bolster the effectiveness of the loose monetary policy.”