Lagarde Says Fed Hike, Slower China to Test Global Economy

IMF's Lagarde: Global Growth Will Slow in 2016
  • World growth will only modestly accelerate next year
  • China faces 'delicate' task of moving to new growth model

Global growth will only modestly accelerate next year as the world grapples with the twin prospects of rising U.S. interest rates and slowing expansion in China, International Monetary Fund Managing Director Christine Lagarde said.

The likelihood that the Federal Reserve will tighten monetary policy, coupled with China’s slowdown, "are contributing to uncertainty and higher market volatility" in the global economy, Lagarde said in a speech in Washington on Wednesday. The IMF will host its semi-annual meetings next week in Peru.

The fund’s World Economic Outlook, to be released Oct. 6, will confirm that the global growth rate is expected to be weaker this year than in 2014, she said. In July, the Washington-based IMF projected world growth of 3.3 percent this year, down from 3.4 percent in 2014, and accelerating to 3.8 percent next year.

The IMF now expects only a "modest acceleration" in 2016, Lagarde said on Wednesday. She didn’t provide a specific forecast.

Disappointing and Uneven

“We see global growth that is disappointing and uneven,” Lagarde said. “The ‘new mediocre’ of which I warned exactly a year ago -- the risk of low growth for a long time -- looms closer.”

Fed Chair Janet Yellen said Sept. 24 that the central bank, which has held rates near zero since late 2008, was likely to begin tightening policy later this year if the economy stays on track. Lagarde has previously urged the Fed to delay liftoff until 2016.

While emerging markets are generally better prepared for higher U.S. rates than in the past, rising borrowing costs and a stronger dollar “could reveal currency mismatches, leading to corporate defaults -- and a vicious cycle between corporates, banks and sovereigns,” Lagarde said.

More broadly, most advanced economies should continue to keep monetary policy loose, while incorporating "spillover” risks into their decision making. Emerging economies need to improve their monitoring of the foreign exchange exposures of major companies, while countries with room to raise public spending should try to boost growth by increasing investment, especially in infrastructure, she said.

The growth potential of the world economy is being held back by low productivity, aging populations, and legacies of the financial crisis, such as high debt, she said.

Modest Pickup

The fund’s latest World Economic Outlook will show evidence of a "modest pickup" in advanced economies, with the euro-area recovery strengthening and Japan returning to growth, she said. However, expansion in emerging economies will likely decline for the fifth straight year. 

While India remains a "bright spot," countries such as Russia and Brazil are facing "serious economic difficulties,” said Lagarde. Growth in Latin America continues to "slow sharply."

In addition, reforms in China to lift incomes will lead to "slower, safer and more sustainable” growth, she said, adding that Chinese policymakers “are facing a delicate balancing act: they need to implement these difficult reforms while preserving demand and financial stability.”