IMF chief believes world’s economy faces threats which could derail recovery
The head of the International Monetary Fund (IMF) said on Thursday that a number of threats could derail the world’s economic recovery, despite signs 2017 will be the best year for global growth since 2010.
IMF Managing Director Christine Lagarde warned that global financial leaders need to beware of a number of threats from growing political tensions to increased scepticism about the benefits of globalisation and rising levels of income inequality.
Lagarde said it will be important for finance ministers from the IMF’s 189-member countries to focus on addressing these threats at a time when the global economy appears to finally be in a sustained recovery following the deep recession caused by the 2008 financial crisis.
“It is not time to be complacent,” she told reporters at a news conference. “Policymakers can use this moment to provide more certainty and provide for the future risks.”
Lagarde’s warning comes as global financial leaders gathered in Washington for the annual meetings of the IMF and its sister lending organisation, the World Bank.
Before Lagarde’s warning, foreign finance leaders already had raised questions about how the Trump administration would pursue its “America First” policies and whether they would harm the global economy with rising protectionist trade pressures or market disruptions from increased tensions with North Korea and other nations.
In addition, finance officials from the world’s 20 biggest economies, the Group of 20, were meeting on Thursday and Friday to discuss the current economic situation. Treasury Secretary Steven Mnuchin and Federal Reserve Chair Janet Yellen are representing the United States at these discussions.
In an updated economic forecast prepared for these meetings, the IMF projected that the global economy will grow 3.6 per cent this year and 3.7 per cent in 2018, putting the world economy on track for its best performance since 2010.
While the IMF boosted its outlook for the 19-country Eurozone, Japan and China, it trimmed its estimates slightly for the United States compared to the projections it had made in April. It now sees US growth at 2.2 per cent this year and 2.3 per cent next year, still up from the lacklustre 1.5 per cent pace of last year.
IMF economists said the reduction of 0.1 percentage point for 2017 and 0.2 percentage point for 2018 reflected less certainty over when the Trump administration will be able to get its tax cut plan through Congress.
Even before the reductions, the IMF’s forecast was well below the 3-per cent growth rates the administration says will be achieved with its policy changes to taxes, regulation and tougher trade enforcement.
A senior US Treasury official, briefing reporters on this week’s meetings, said the IMF “has other things to do in the world than interject itself into the US tax debate.” The official spoke on condition of anonymity to be able to discuss the US agenda in advance of the meetings taking place.
Lagarde said that one thing the major economies will need to handle carefully is the movement away from massive economic support from their central banks. Such a move if not well-telegraphed in advance could disrupt global financial markets and reduce needed capital to developing countries.
The Federal Reserve has announced that it will start this month trimming its US$4.5 trillion balance sheet, which was increased five-fold since 2008 as the Fed tried unconventional means to jump-start economic growth. The European Central Bank and the Bank of Japan have undertaken similar efforts.
On Thursday, European Central Bank chief Mario Draghi defended the ECB’s aggressive easy-money campaign to revive the economy of the 19 countries that share the euro currency.
He said the measures, which include a massive bond-buying programme meant to push down interest rates, had helped create 7 million jobs over the last four years.
Speaking at a conference at the Peterson Institute for International Economics, Draghi conceded that unconventional monetary policy can have unintended economic fallout. But, he said, “the bottom line is, the distortions may be there, but sometimes the trade-off is so powerful that you just ignore them and do the right thing.”