On Wednesday, September 30th, Christine Lagarde, Managing Director of the International Monetary Fund warned of sluggish growth next year for the Global Economy. It is expected, that when the IMF releases their outlook on worldwide growth this upcoming Tuesday, forecast will be lowered, something the IMF already did in July when they lowered global growth forecasts from 3.5% to 3.3%, the weakest rate since the financial crisis.
During her conversation at the Council of the Americas, Ms. Lagarde gave a preview of critical issues facing the global economy ahead of next week’s Annual Meetings of the Boards of Governors of the World Bank Group and the IMF in Lima. As China experiences economic slowdown, the Federal Reserve moves closer and closer to a pending rise in interest rates, countries experience a sharp deceleration in the growth of global trade, rapid drop in commodity prices, and Europe deals with their refugee crisis, Ms. Lagarde expects that emerging economies could experience a fifth consecutive year of slowing activity.
Concerned that emerging markets may have depleted their reserves in the wake of a financial crisis, Ms. Lagarde urged the Federal Reserve to refrain from raising interest rates until next year, a move that has been expected to take place towards the end of this year. “The prospect of rising interest rates in the United States and China’s slowdown are contributing to uncertainty and higher market volatility,” Ms. Lagarde said.
However, Ms. Lagarde stresses, her goal is not to put a grim outlook on global growth, but rather to encourage world leaders and current policymakers to make upgrades to address the current challenges. For example, as she mentions during her conversation, incorporating spillover risks in monetary policy decision-making in advanced economies; tackling nonperforming loans in the euro area to boost credit to companies and households; using macroprudential tools in emerging markets to address corporate leverage and foreign debt.
Ultimately however, Ms. Lagarde looks to warn emerging markets and corporations from the inevitable interest rate hike, in hopes that they will have enough time to prepare themselves as firms struggle to meet sharply higher borrowing costs. “Shocks to the corporate sector could quickly spill over to the financial sector and generate a vicious cycle as banks curtail lending. Decrease loan supply would then lower aggregate demand and collateral values, further reducing access to finance and thereby economic activity, and in turn, increasing losses to the financial sector,” the IMF warns.
By: Predrag Vulicevic