IMF chief sees shaky confidence denting global growth

WASHINGTON Mon Sep 24, 2012 4:04pm EDT

International Monetary Fund Managing Director Christine Lagarde delivers remarks on the state of the world economy at the Peterson Institute for International Economics in Washington, September 24, 2012. REUTERS/Jonathan Ernst

International Monetary Fund Managing Director Christine Lagarde delivers remarks on the state of the world economy at the Peterson Institute for International Economics in Washington, September 24, 2012.

Credit: Reuters/Jonathan Ernst

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WASHINGTON (Reuters) - The International Monetary Fund is set to cut its forecast for global growth next month with uncertainty over whether European policymakers will keep promises to address the euro zone crisis weighing on confidence, the head of the IMF said on Monday.

"We continue to project a gradual recovery, but global growth will likely be a bit weaker than we had anticipated even in July, and our forecast has trended downward over the last 12 months," IMF Managing Director Christine Lagarde said.

In July, the IMF cut its global growth projection for 2013 to 3.9 percent but left its 2012 forecast at 3.5 percent.

Lagarde said the euro zone debt crisis posed the greatest risk to the world economy but that the U.S. fiscal cliff also presented a "serious threat."

The uncertainty over whether officials would effectively address those main trouble spots was now affecting economies in the rest of the world, she said.

Lagarde said emerging market economies were now clearly slowing and there was "great concern" in poor countries about rising food prices and volatile commodity prices. There were also signs of growing frustrations with political transitions in the Middle East, she added.

She said financial markets have been buoyed by recent decisions taken in Europe to address the debt crisis and now want to see euro zone policymakers working together to implement the measures.

"But we have seen positive market responses before that turned out to be short-lived," Lagarde cautioned. "This time we need a sustained rebound, not a bounce."

Markets have rallied in recent weeks on the European Central Bank's decision to launch a conditional bond-buying program for troubled states, but the euro zone is slipping into recession and there are concerns about the path of economic and budget reforms in Italy and France, two of Europe's biggest economies.

The ECB's decision helped drive borrowing costs lower for beleaguered Spain, although Madrid is still considering a bailout to handle a high public deficit and soaring debt.

Lagarde said structural reforms and fiscal adjustments were unavoidable in crisis-hit euro zone countries. She said the IMF supported the idea of giving countries, such as Portugal and Spain, more time to implement budget and other reforms.

Lagarde reiterated IMF calls for Europe to move to a banking union, which she said could help prevent nations from being dragged down by sickly banks. Ireland received a bailout after rescuing its banks, and Spain appears headed down the same path.

"We continue to believe it should be initiated as soon as possible - to break the vicious cycle between banks and sovereigns," she said, adding: "We are not naive, we know it will take time."

KEEPING WATCHFUL EYE

Lagarde said some emerging economies may need to put monetary and fiscal tightening in place or even add stimulus, such as in the case of China, to protect their economies.

In other emerging economies, ensuring that high credit growth does not endanger financial stability was important, she said.

She said measures taken by China aimed at supporting growth will provide some short-term support but over the longer term the country must lift domestic consumption and demand.

"I think it goes in the right direction," Lagarde said during a question-and-answer session. "But in the medium term, what certainly is called for, quite eloquently by the to-be new leaders, is a model of growth that is geared toward ... consumption, by the domestic market growth, rather than the growth of exports."

As for the world's poorer nations, Lagarde said the 20 percent increase in global food prices since June was a concern and the international community should stand ready to support these countries in need.

(Additional reporting by Alister Bull; Editing by Andrea Ricci and James Dalgleish)

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Comments (3)
ruhr wrote:
No doubt we will eventually exit the economic turmoil undermining world growth. However, looking to the future, can we afford to continue with a financial landscape where government is not a direct participant in the financial sector?
Without delving into the many factors, it is clear the ability of government to perform its role is being degraded, and becoming more and more financially unsustainable as declining tax revenue fails to keep pace with expenditure. This is compounded by the credit crisis affecting the banking establishment, acting as a brake on business investment and job creation. It is only right then that we look to the status quo and asks whether the financial system as currently established is best placed to execute the role of driving economic growth, or whether government may take a more active part in the market as home lender to achieve that outcome.
Consider that government as a lender –specifically a mortgage lender- is positive in three major areas: the public gain as the cost of debt is reduced increasing disposable income; the government gain as revenue increases reducing the need for borrowings, reducing or eliminating deficits and reducing debt to GDP ratios; and the financial sector at a stroke gain as a mountain of capital allocated to housing is re-directed to the corporate bond and equity markets, both deepening and widening the sources of funding for small and corporate business investment, sustaining and driving long term growth.
To start the ball rolling government may commence the process by providing access to home mortgages capped at 4% return over 25 years, delivering a housing recovery, reviving economic growth and putting the jobless back to work. It is well to recall it is not debt per se that concerns the market, but the demonstrated ability of government to manage and reduce deficits and debt over the long term; government in receipt of a continuing revenue stream from mortgage repayments amply meet the requirement.
How soon we exit the current financial crisis is up for grabs, of one thing we can be certain. We must look to the future and strengthen the financial system ensuring the system better serves the needs and interest of the public, government, and small and corporate business, all at one and the same time.

Sep 24, 2012 6:57pm EDT  --  Report as abuse
RobertReeves wrote:
OMG! Here we go again………… Tell me did you bring the old Eurozone story out of the closet in order to break the metals again?
Folks we are bored with the Eurozone. Find some other negative news to report on.
We all know the Eurozone is moving at a snails pace so why talk about it?
Next! Hey what about all the muslums that hate AMERICA? Thats a better story and truely one can stir up some worries
SO F— the Eurozone
Let Merkel and the Frenchman kill eachother.

Sep 24, 2012 11:53pm EDT  --  Report as abuse
In the account by Reuters, IMF chief Christine Lagarde said that “the U.S. fiscal cliff also presented a ‘serious threat.’” In the account in the Wall Street Journal, she said that the financial “industry isn’t safer yet than before the 2007-2008 financial crisis.” The failure of Obama and Congress to reach a deal on spending and taxes could cause stock prices to “plummet 15% and cut US output between 2% and 5%.” With US growth at 1.9%, the US would go into recession with negative 0.1% to negative 3.1% growth. I have been warning the US about this for over a year, and the IMF is confirming my warnings.

Sep 25, 2012 3:26pm EDT  --  Report as abuse
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