|IMF: WORLD ECONOMY COULD BE ENTERING ‘SOFT PATCH’|
Oranjestad, June 5, 2013 - Christine Lagarde sounded the alarm over the health of the global economy as she said that the world could be entering a “soft patch” for growth.
“We are . . . seeing some glimpses of more sombre trends,” in the last month said the managing director of the International Monetary Fund in a speech at the Brookings Institution in Washington.
Ms Lagarde’s warning highlights signs of an economic slowdown in fast growing emerging markets, as well as more weak data from Europe, that threaten to undermine the recovery in demand worldwide.
Her remarks develop on a speech in April where she warned of a three-speed global economy but suggest that the IMF has become more pessimistic in the space of only a few weeks.
“Recent data, for example, suggest some slowdown in growth. At the same time, the downside risks to growth remain as prominent as ever,” she said.
Ms Lagarde said that the US is suffering from self-inflicted wounds and needs to ease up on the pace of fiscal tightening, called for more monetary easing from the European Central Bank, and insisted that Japan must go through with a rise in consumption tax later this year.
She said that growth prospects had weakened in the large, BRICS emerging markets – her group of countries expanding at top speed. “In China, recent activity has been weak and growth remains too reliant on credit, property investment, and infrastructure. Investment prospects also look less bright in key markets like Brazil, India, Russia and South Africa.”
She called on developing countries to push ahead with tackling domestic obstacles to growth – such as lack of infrastructure, poor governance and regulatory bottlenecks – while guarding against spillovers from easy monetary policy in rich countries.
In the US – part of her second group of countries with middling growth – she said that good progress in the recovery was being hurt by overly aggressive fiscal policy. “The US is not doing as well as it should, largely because of self-inflicted fiscal wounds. This year alone, fiscal adjustment will constitute an enormous 2.5 per cent of GDP.”
Ms Lagarde urged an end to across-the-board, sequestration cuts to public spending, a “durable solution” to raising the debt ceiling, and a plan to tackle deficits in the longer-run.
“The bottom line is clear: while fiscal adjustment might be too aggressive in the short term, it is certainly far too timid in the medium term.”
She said that the euro area and Japan still belong in her third group of struggling economies. She warned that tight financial conditions and weakness in the periphery of the eurozone are “draining momentum even from countries like Germany and France”.
As well as looser monetary policy, she said it should be a priority to recapitalise European banks, move to a single banking supervisor, and adjust the pace of fiscal consolidation where there is no immediate pressure from financial markets. “Elsewhere, the pace should be attuned to the speed of recovery, as the Europeans themselves are increasingly recognising.”
Finally, she said that Japan’s economy has sped up in the last few months, but that monetary policy “needs to be complemented by a more balanced fiscal policy”.