FXStreet (Mumbai) – IMF Managing Director Christine Lagarde in a guest article for German newspaper Handelsblatt published today said that she feels global economic growth will be “disappointing” in 2016. She is of the opinion that the US Fed’s decision to increase interest rates together with the economic slowdown in China has raised uncertainty about the global economic outlook. She said low productivity, aging populations and the impact of the global financial crisis were weighing on growth.
Lagarde added that slowdown in emerging economies particularly China and slump in oil prices has affected global trade. Fall in raw material prices is threatening economies based on these. Financial sector in several countries can still be considered weak while and financial risks appears to be rising in many of the emerging countries. She said “All of that means global growth will be disappointing and uneven in 2016”.
She noted the positive changes introduced to put economy on track in the developed countries and said the fact that normalization of U.S. monetary policy has started and China has marked it transformation towards consumption-led growth were both “necessary and healthy”. She however thinks that for these policy changes to be successful, the respective countries must carry them out as smoothly and efficiently possible.
She also identified the “potential spillover effects” of the Feds decision to raise interest rates for the first time since 2006. She pointed out that this increase in rates would imply higher financing costs for some borrowers, including in emerging and developing markets.
Though the Fed has assured that the subsequent rates hikes will be gradual, Lagarde is concerned about the ability of the markets to absorb the shock. She noted “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 warned that in the event of interest rates increase in the US and a stronger dollar the possibility that firms would default on their payments would increase. She feels this situation will then likely “infect” banks and states rendering a blow to sustainable growth.
(Market News Provided by FXstreet)