January 15, 2015 - GLOBAL ECONOMY - Strong headwinds from weak investment, substantial debt burdens and high unemployment are preventing a pickup in global economic growth despite a strengthening U.S. recovery and tumbling oil prices, International Monetary Fund Managing Director Christine Lagarde said.
A healthier U.S. and cheaper energy “won't suffice to actually accelerate the growth or the potential for growth in the rest of the world,” the head of the emergency lender to nations said in a speech Thursday at the Council on Foreign Relations in Washington.
“If the global economy is weak, on its knees, it’s not going to help,” said Ms. Lagarde in remarks previewing the IMF’s latest forecasts for the global economy due out on Monday.
The eurozone, at risk of a third recession in six years, continues to struggle with the fallout from the 2008 financial crisis. Japan is also mired in low inflation, high debt and anemic growth. And output in many major emerging markets—economies that have provided most of the gas for global growth over the last decade—is slowing faster than expected.
Nonetheless, the IMF is upgrading its forecast for economic output in the U.S., one of the few advanced economies bucking the weak global-growth trend. But the world’s biggest economy and a shot in the arm from cheaper gasoline aren’t cures for deep-seated weakness elsewhere, Ms. Lagarde said.
“Too many companies and households keep cutting back on investment and consumption today because they are concerned about growth tomorrow,” she said.
Both Europe and Japan are at risk from a much longer period of excessively low inflation and anemic growth, the former French finance minister said.
Years of stagnation in two of the world’s biggest economies also threaten to drag down global growth. That would make it even harder for those economies to cut their dangerously high debt levels and raise employment, two persistent legacies of the financial crisis.
The Bank of Japan has expanded its cash injections to help spur growth, while European Central Bank officials have signaled plans for a new bond-buying program that could be announced as soon as next week.
Meanwhile, markets are expecting the U.S. Federal Reserve this year to raise borrowing rates for first time since 2006.
The schism between interest rates moving in different directions around the globe is one of the major reasons the dollar has hit decadelong highs in recent weeks against a basket of currencies. Ms. Lagarde said the Fed’s expected midyear rate increase will likely fuel further strong swings in international capital flows, exchange rates, bond prices and stock markets.
Many emerging markets are increasingly exposed to turmoil elsewhere, especially those with high dollar-denominated debt. As those countries’ currency values fall and their growth prospects dim, investors are rethinking their high-risk investments. “Among those emerging markets, some are likely to face a triple risk” from a stronger U.S. dollar, higher global interest rates and volatile capital flows, the IMF head said.
Ms. Lagarde also said oil’s price fall should, on balance, boost global growth, as consumers have more money left over after filling their car tanks to spend in other sectors of the economy. But she acknowledged the decline is also adding to deflation risks in Europe and Japan, bolstering the case for central bank action.
The high risk of recessions and years of slow global growth are why policy makers need to take more aggressive action, she said. Aside from pushing for a longer period of easy-money policies and more infrastructure investment, the IMF has been urging the Group of 20 largest economies to honor promises for economic overhauls to reignite growth prospects.
“Policy makers have to step up structural reforms. There’s a lot of talk about it, and some are doing it, but there has to be real implementation,” she said. “All of that is not new, but it takes a sense of increased urgency.”
In many countries, efforts to restructure labor and product markets, overhaul education, health, and social safety nets, or approve trade deals that would open up protected markets have faced stiff political hurdles. Some economists fear the longer growth remains weak, the more politically difficult those economic policy changes may become. - WSJ.