Euro Zone Crisis

IMF's Lagarde says growth to remain weak in 2013

PUBLISHED : Thursday, 11 April, 2013, 10:46am
UPDATED : Friday, 12 April, 2013, 4:45am


Related topics

The global economy will not gain much traction this year as Europe and Japan fail to recover, trailing other developed economies, International Monetary Fund managing director Christine Lagarde has said.

"We do not expect global growth to be much higher this year than last," Lagarde said in the prepared text of a speech in New York six days before the IMF releases its latest 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," she said.

After some progress, the 17-country euro zone still has a lot of work to do, including cleaning up a banking system that is not lending enough money to the real economy, Lagarde said.

Japan needs to rely more on monetary policy to boost its growth, she said, nevertheless welcoming last week's move by the country's central bank to embark on a programme of record monetary easing.

The Washington-based IMF is about to co-fund its fourth bailout in the euro zone by contributing about US$1.3 billion to Cyprus's rescue package.

Lagarde said the United States is in better shape, but warned about the risks posed by automatic spending cuts that kicked in last month, and which are known as sequestration.

"This risks throwing away needed growth, especially at a time when too many people are still out of work," she said. "It is also an extremely blunt instrument, imposing deep cuts in many vital programmes - including those that help the most vulnerable - while leaving untouched the key drivers of long-term spending."

US President Barack Obama sent a US$3.8 trillion budget to Congress yesterday, calling for more tax revenue and slower growth in Social Security benefits, in a political gamble intended to revive deficit-reduction talks.

The Obama administration's proposal would replace across-the-board spending cuts with what White House budget officials say adds up to US$1.8 trillion in additional deficit reduction over a 10-year period by collecting more taxes from the wealthy and trimming some federal programmes.

In January, the IMF forecast global growth of 3.5 per cent this year, after 3.2 per cent last year. It has since said it would cut its prediction for the US because of the budget cuts.

The US has been faster than Europe to repair its financial system, and its efforts have paid off as credit conditions have improved and unemployment is showing signs of falling, Lagarde said.

"There should not be massive, brutal, upfront additional fiscal consolidation, because it is going to hamper growth," Lagarde said of the US in an interview on American television network CNBC yesterday.

"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.