The global economic outlook for 2016 is not very positive according to Christine Lagarde, the Managing Director of International Monetary Fund (IMF). Setting forth her views in a guest article in the German newspaper Handelsblatt, she recently predicted that growth in the forthcoming year would be disappointing and that the outlook for medium-term growth has deteriorated due to factors like reduced productivity, an aging population and the continual impact of the global financial crisis.
The forecast for 2016 released by the IMF earlier this year was that the world economy would grow by 3.6 percent. Lagarde states that the likely increase of interest rates in United States (U.S) and the expected slowdown of Chinese economy are contributing to feelings of uncertainty and heighted the risk of economic vulnerability across the world. Additional compounding factors include slowdown in global trade and decline in raw material prices which adversely affects economies that depend on it.
Apart from this, weak financial systems in many countries and rising financial risks in emerging markets are also contributing to volatility. In Lagarde’s view, while recent developments like normalisation of U.S monetary policy and China shifting to a consumption-led growth path were necessary and healthy, they must be accomplished as smoothly and efficiently as possible.
Interest rates were hiked by the U.S. Federal Reserve earlier this month after nearly a decade of near-zero rates. This is said to be the beginning of a gradual tightening in the US monetary policy. She has listed her concerns on the ripple effects arising from this significant development. Borrowing is already more expensive for borrowers like emerging and developing markets on the prospect of increased interest rates, and this is likely to continue.
With a strengthening dollar, market players with debt in dollars and earnings in local currencies might find it difficult to manage. Payment defaults could destabilise companies and consequently “infect” banks and states, although the risks could be managed by measures like demand creation, maintaining financial stability and initiating financial reform.
In the article, Christine Lagarde went on to say
Most highly developed economies except the USA and possibly Britain will continue to need loose monetary policy but all countries in this category should comprehensively factor spillover effects into their decision-making.
She has also put forward a number of suggestions to handle the coming changes in a smooth fashion. Some of the changes recommended by Lagarde include improved monitoring of the foreign exchange risks and budget restructuring.
