The global economy won’t gain much traction this year as Europe and Japan fail to recover and lag behind other developed economies, International Monetary Fund Managing Director Christine Lagarde said.
“We do not expect global growth to be much higher this year than last,” Lagarde said, according to the prepared text of a speech in New York six days before the IMF releases its new forecasts for the world economy. “We are now seeing the emergence of a ‘three-speed’ global economy -- those countries that are doing well, those that are on the mend, and those that still have some distance to travel.”
After some progress, the 17-country euro region still has a lot to do, including cleaning up a banking system that isn’t lending enough to the real economy, Lagarde said. Japan needs to rely more on monetary policy to boost its growth, she said, while welcoming last week’s move by the Bank of Japan to embark on record easing.
The Washington-based IMF is about to co-fund its fourth bailout in the euro region by contributing about $1.3 billion to Cyprus’s rescue package. While the U.S. is in better shape, Lagarde warned about risks posed by automatic spending cuts that started taking place last month, known as sequestration.
“This risks throwing away needed growth, especially at a time when too many people are still out of work,” Lagarde said. “It is also an extremely blunt instrument, imposing deep cuts in many vital programs -- including those that help the most vulnerable -- while leaving untouched the key drivers of long-term spending.”
President Barack Obama today sent a $3.8 trillion budget to Congress calling for more tax revenue and slower growth for Social Security benefits in a political gamble intended to revive deficit-reduction talks. The proposal would replace across-the-board spending cuts with what White House budget officials say is $1.8 trillion in additional deficit reduction over 10 years that includes collecting more taxes from the wealthy and trimming some federal programs.
The IMF in January forecast global growth of 3.5 percent this year, after 3.2 percent in 2012. It has since said it would cut its prediction for the U.S. because of the budget cuts.
Still, the U.S. was faster than Europe in repairing its financial system and its efforts have paid off as credit conditions have improved and unemployment is showing signs of falling, she said.
“There should not be massive, brutal, upfront additional fiscal consolidation, because it is going to hamper growth,” Lagarde said of the U.S. in an interview on CNBC television later today. “There should be some, but moderately.”
“The investors, the world needs to know that the United States of America has a plan to reduce its high debt and to keep under control its deficit and reduce it,” she told CNBC.
Answering questions after her speech, Lagarde repeated that the bailout of Cyprus, which imposed losses on uninsured depositors at two of the country’s banks, is “no template, it doesn’t set a standard because it was no standard itself.”
While emerging markets are bouncing back and continue to power global growth, Lagarde pointed out some risks in these countries too, citing companies “taking on more debt and foreign exchange exposure.” At the same time, she downplayed risks that expansionary monetary policies in rich economies could have too large an impact on capital flows and exchange rates.
“In present circumstances, it makes sense for monetary policy to do the heavy lifting in this recovery by remaining accommodative,” Lagarde said. “We know that inflation expectations are well anchored today, giving central banks greater leeway to support growth.”