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IMF chief warns of endless “slow growth” unless countries act together

IMF chief warns of endless “slow growth” unless countries act together Anthony Harrington

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One of the problems with having to give a seemingly endless series of speeches, as the IMF chief Christine Lagarde has to do, is that it is all too easy to end up mired in rhetoric. Lagarde’s recent speech to the School of Advanced International Studies is a case in point. Lagarde felt called upon to say a few words about the state of the global economy and wound up caught between the glass being half full and it being half empty.

Hooray, the world seems to be turning a corner at last on the Great Recession. Whoops. Growth is so weak it looks as if it could fall over and die at any moment. What to do? What do we need? Concerted global action says Lagarde – whatever that might mean. Are we going to get concerted global action? Of course we’re not. G8 – excuse me – G7 meetings (concerted action by the 7 to exclude the 8th – hardly the kind of concerted action Lagarde has in mind though) tend to be exercises in fudges. They inch towards promising agreements but always stop short. As Lagarde pointed out in her speech, the IMF can’t even get the much needed reforms it wants to make to its own structure and governance through. The US Congress failed to oblige, leaving the IMF with no option other than to dust down its proposals and resubmit them, hoping that Congress is more receptive next time round.

Let’s face it. None of us know if we are really out the woods yet as far as the Great Recession is concerned. Things look promising, but hmm, European inflation is down to 0.7%, forcing Mario Draghi to spend some time in his latest ECB press conference denying that the ECB is concerned that the EU is sliding towards deflation. The latest German PMI figures were gloomy. Russia’s gone all nationalistic and its troops are swarming on the borders of the Ukraine. None of this is good. As Lagarde notes in her speech, although the IMF is anticipating a slight increase this year and next on the 3% global growth figure for 2013, even if this turns out to be the case, the global economy will still be underperforming by comparison with the trend of the last few decades.

On the positive front Lagarde and the IMF are pleased that advanced markets are finally starting to shoulder some of the responsibility for growth, albeit at varying speeds. Over the past five years, she points out, emerging markets have contributed 75% of the increase in global growth. Largarde notes:

“The recovery is becoming a bit more balanced in an overall economic landscape that has changed significantly.”

Emerging Asia is expected to post growth of around 6.5% this year. Sub-Saharan Africa is growing at 5%. However, as Lagarde points out, one doesn’t have to look very far to see challenges to growth at every hand. The euro-area super low inflation could still drift down towards deflation, so QE looms in Europe; meanwhile, for its part, the Bank of Japan doesn’t dare slack up on its money printing. The US tapering of QE is still roiling the waters for emerging economies and that game has still to play out. A binge by EM corporates on cheap dollar loans is coming home to roost, and those EM governments that simply frittered away the growth of the last 10 years without driving through structural reforms and productivity increases are going to struggle to resolve rising fiscal deficits in a much harsher interest rate climate as and when US rates rise.

Once again, Lagarde called for clear communication between all central banks, which is code for a request to the Federal Reserve to be a little less US-centric – a call the Fed has persistently rejected as not being part of its mandate. How all this will play out is the big question. Things are looking positive but much remains to be done and tendencies to protectionism and fractious behavior are breaking out on all sides. Worst of all, high youth unemployment in a large number of countries remains a huge source of instability and a fertile recruiting ground for the likes of Al Qaeda or any other group who promises disillusioned youth that violence rather than the acquisition of skills offers them a way forward to a better land.

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Further reading on demographics:

Tags: Al Qaeda , Christine Lagarde , IMF , reform of the IMF , The Great Recession , US Congress
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