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article imageLagarde says IMF may reduce global growth forecast in next report

By Ken Hanly     Sep 2, 2016 in Business
Policy makers in the world's biggest economies have failed to steer them out of the worst slow-growth rut they have experienced in almost three decades. The IMF warned leaders that the outlook could be for even slower global growth.
The G20 countries are to meet later this week in China. The IMF warns that urgent action is needed to help revive weak trade and investment levels. Protectionism is also rising resulting a trend that will result in less trade. The G20 or Group of Twenty, is an international forum where government officials and central bank governors, study, review, and discuss policy issues dealing with the promotion of international financial stability. It was founded in 1999.
Christine Lagarde, the managing director of the International Monetary Fund (IMF) said:“The political pendulum threatens to swing against economic openness, and without forceful policy actions, the world could suffer from disappointing growth for a long time. High frequency data points to softer growth this year.” If the IMF does downgrade economic growth again, it could make 2016 growth the lowest since the 2009 fiscal crisis.
Global markets were roiled by the Brexit vote to have the U.K. leave the EU. But the effect was not lasting. Rather, it is meager output, low inflation and slowing trade, that is indicating a slower global growth rate than the 3.1 percent growth forecast by the IMF for July.
U.S. growth, while positive, is not that high, weighed down by a strong dollar causing weak exports. The IMF said it would downgrade its next forecast of US growth from the 2.2. percent forecast this July. European economies are still struggling after the financial crisis. Japan has been unable to stimulate growth and is even flirting with recession. China's slowdown and the drop in commodity prices have hurt many emerging markets such as Brazil and Russia, both coping with contractions lasting two years. Nigeria is now in recession. Many commodity exporters are seeking assistance from the World Bank and the IMF as their debts and deficits rise.
Most central banks are keeping interest rates at near zero but this has not resulted in much increase in investment or growth. The IMF worried that the outlook for slower growth could result in further disincentives to investment and exports leading to even less demand. Flat income growth for many wage earners would also lead to less demand but also a movement against globalization and free trade.
The IMF said:“These developments threaten to open another negative dynamic, in which political action fails to deliver the structural reforms needed to lift growth and instead turns toward inward-looking assaults on free trade.” The IMF has already reduced its global growth forecast for this year from 4.6 percent to 3.1 percent. The IMF said a global stimulus program is necessary to stave off an even worse decline in production. Lagarde said: “Inaction risks reversing global economic integration, and therefore stalling an engine that, for decades, has created and spread wealth around the globe. This risk is, in my view, too large to take.” However, US Treasury Secretary Jacob Lew said: “We certainly are not seeing a global recession like we did in 2008, but I think that the macroeconomic policies have failed to take advantage of the opportunity to have a more robust period of growth.”
Commenting on the situation after the Brexit vote Lagarde said: "You could argue that Brexit is not really delivering the massive crisis that we had expected, you could argue that the Chinese transition is proceeding reasonably well, and you could argue that low commodity prices have gone up a little bit. So this is on the surface. However, when you look deep down at the economic growth prospects, at the growth potential, at the productivity, we are not getting very good signals, and we will probably be revising down our forecast for growth in 2016." Lagarde said that the full impact of the Brexit vote would not be known until next year. She noted, however, that the pound's value had already declined by 15 percent. The IMF is scheduled to issue a new forecast in early October just ahead of its annual meeting. If another decline is forecast, it would mark the sixth straight decline in the last 18 months.
Lagarde also pleaded for countries to contribute funds of $5 to $6 billion to support Egypt, which recently negotiated a $12 billion dollar loan from the IMF. Lagarde said that she was encouraged by Greece's recent privatization moves but still would not participate in the bailout: "We are not party to the program because I have said repeatedly that the program has to walk on two legs. One, there has to be significant reforms and second there has to be a debt that is sustainable by our standards and our measurements and this at this point in time is not the case."
Lagarde faces an upcoming trial in France regarding a $448 million payout to French businessman Bernard Tapie. She said the trial would not interfere with her management of the IMF. In July, France's highest appeal court ruled Lagarde must stand trial for negligence in the use of public funds for her role in seeking an out-of-court arbitration settlement for Tapie in 2008 when she was the French Minister of Finance. The IMF board has expressed confidence in Lagarde's ability to lead the IMF. Lagarde said: "I draw a lot of strength and determination from the very strong support from the board,. And I rely on good and solid lawyers who have to do their jobs, so it's not a distraction for me. I focus my energy and time on the mission of the IMF and what I have to do to serve that mission."
More about Christine Lagarde, Imf, Global economic growth
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