International Monetary Fund (IMF) Managing Director Christine Lagarde presented a fresh assessment of the state of the global economy in a speech to the Atlantic Council of the U.S. The speech took place against a background of speculation as to when and how the Federal Reserve will move to raise interest rates, how Fed policy will interact with the policies of major trading partners and the volatility of the price of oil, and a week before the IMF's spring meeting.
She was introduced by author and former journalist Fred Kempe, CEO of the Council, who declared that he and the Council are "fans" of Lagarde for her achievements as an international lawyer and for her consensus-building skills, managing a staff that often works in "unstable and corrupt settings." He quoted Klaus Schwab, founder of the World Economic Forum, who listed four characteristics of a leader — to have a soul, to have a heart, to have brains and to have good nerves — and praised Lagarde for addressing challenges she cannot choose.
Lagarde singled out as the most significant developments since the last meetings of the IMF and World Bank in October the decline in global oil prices and the improved economic performance of the U.S. She found that "Overall, macroeconomic risks have decreased."
Lagarde characterized the continuing global recovery as "moderate and uneven." Also, in contrast to the decline in macroeconomic risks, "Financial and geopolitical risks have increased." She described the estimated 3.4 percent in world GDP growth as "not bad" and in line with performance during the last three decades. What makes these results uneven is what Lagarde called the "lingering hardship" from the global financial crisis.
According to Lagarde, level growth is "not good enough," and she warned of the risk of a "new mediocre, low growth for a long time." She quoted JFK, the "great Atlanticist," who said that the risks of action are "far less than the risks of comfortable inaction." Her theme was that growth must be lifted "by using all of the tools and policy space available, to prevent the 'new mediocre' from becoming the 'new reality.'" Lagarde called for strengthening the financial system, fostering development and making growth more inclusive and sustainable.
She performed a "quick health check" of the global economy and found advanced economies doing slightly better, with the recovery "firming up" in the U.S. and U.K., along with the eurozone. The emerging and developing economies are doing "slightly worse, with lower commodities the driver." She referred to "economic difficulties" in Russia and "stagnation" in Brazil, and many parts of the Middle East are "beset by political and economic turmoil."
This circumstance implies policies to address what she called last year "the low-low, high-high risk," with inflation and growth low, unemployment and debt high in a number of advanced economies. The policy levers Lagarde would apply begin with "demand support" through "continued monetary policy accommodation, especially in the eurozone and Japan" She called fiscal policy to be "calibrated to the recovery, without ever losing sight of debt sustainability."
This writer would warn that the fiscal battle has been lost for decades, and the global economy is at risk of a renewed financial crisis due to indifferent performance by the financial regulators.
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