Lagarde Hints at Global Forecast Cut Even as U.S. Rebounds

International Monetary Fund Managing Director Christine Lagarde signaled a cut in the institution’s global growth forecasts, saying investment is still weak and that risks remain in the U.S. even as its rebound accelerates.

“The global economy is gathering speed, though the pace may be a bit less than we previously predicted because the growth potential is lower and investment” spending remains lackluster, Lagarde told the Cercle des Economistes conference in Aix-en-Provence, France.

The remarks underline the threats to global economic growth at a time when the U.S. Federal Reserve is trimming stimulus and the European Central Bank is fighting inflation that is less than half its targeted level. The IMF is preparing to update its economic forecasts this month after predicting April 8 that the global economy will expand 3.6 percent this year and 3.9 percent in 2015.

Growth in the U.S., the world’s largest economy, is set to accelerate in coming months and Asia’s emerging market economies will avoid a hard landing, though the European recovery is still not as strong as it should be, Lagarde said.

Jobless Data

In the U.S. “we expect a significant rebound,” Lagarde said, adding that risks to U.S. growth include the ability of the Fed to taper in an “orderly” manner and that of the Treasury to put in place a medium-term budget framework.

A July 3 Labor Department report showed employers in the U.S. expanded payrolls by 288,000 workers last month, pushing down the jobless rate to 6.1 percent from 6.3 percent in May, a level Federal Reserve officials didn’t expect to see before the end of the year. Treasuries declined after the figures were released, while the Dow Jones Industrial Average rose above 17,000 for the first time.

Fed officials are debating how long to keep the benchmark federal funds rate near zero after completing a bond-buying program that’s set to end late this year. The Federal Open Market Committee repeated on June 18 that it expects the rate to remain near zero for a “considerable time” after the purchases end work.

Fed Chairwoman Janet Yellen said last month the central bank doesn’t intend “to signal any imminent change” in policy and that the balance sheet will remain large “for some time.”

Investment Deficit

While the key risk in the euro area remains inflation that’s too low, Lagarde also urged caution on public investment plans as the region’s governments study ways of supporting the recovery in the wake of a sovereign debt crisis. French President Francois Hollande has said that Europe should use all flexibility available in its fiscal rules and consider exempting investment spending from deficits.

“We see an investment deficit everywhere,” Lagarde said. Yet public policy must be dictated by debt sustainability, she said. “If you’re not in a medium-term situation that assures sustainability, you can’t undertake major infrastructure investments.”

Countries with lower debt burdens and higher growth are the ones who can afford to boost investment, she said. France has less need to renew its infrastructure than Germany, the U.K. and the U.S., Lagarde, a former French Finance Minister, added.

“This has to be done on a case by case basis,” she said.

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