World Economy

IMF's Lagarde: We're not in a crisis, but here's the not-so-good news

Downside risks are increasing: IMF's Lagarde
Downside risks are increasing: IMF's Lagarde

The world economy is continuing to recover but it's still at a delicate stage, IMF Managing Director Christine Lagarde has warned.

"We have growth; we are not in a crisis. The not-so-good news is that the recovery remains too slow, too fragile, and risks to its durability are increasing," Lagarde said in a speech Tuesday in Frankfurt, Germany.

She warned that because growth had been "too low for too long", too many people were "simply not feeling it".

Christine Lagarde
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"Let me be clear: We are on alert, not alarm. There has been a loss of growth momentum. However, if policymakers can confront the challenges, and act together, the positive effects on global confidence—and the global economy—will be substantial," Lagarde said.

In its January World Economic Outlook, the organization cut its global growth forecast to 3.4 percent for 2016 and 3.6 percent in 2017. It warned that the pick-up in global activity was projected to be more gradual than in its October outlook.

"The slowdown and rebalancing of the Chinese economy, lower commodity prices, and strains in some large emerging market economies will continue to weigh on growth prospects in 2016–17," the IMF's January report said.

The IMF releases its latest set of forecasts next week.

Lagarde warned that the global outlook had weakened further over the last six months—exacerbated by China's relative slowdown, lower commodity prices, and the prospect of financial tightening for many countries.

"In the United States, growth is flat due partly to the strong dollar; in the euro area, low investment, high unemployment and weak balance sheets weigh on growth; in Japan, both growth and inflation are weaker than expected," she said.

Meanwhile, China's transition to a more sustainable economic model has led to a slowdown in growth, while downturns in Brazil and Russia were larger than expected, she added. On top of this, the Middle East had been hit hard by the oil price decline.

Lagarde said further easing from the European Central Bank, which unleashed a bigger-than-expected package of stimulus measures last month, and the Federal Reserve's "apparent shift to a slower pace of rate increases" had improved economic sentiment.

But longstanding "crisis legacies" - high debt, low inflation, low investment, low productivity, and, for some, high unemployment - posed a risk for advanced economies. Emerging economies meanwhile were at risk from lower commodity prices, higher corporate debt, volatile capital flows, she warned.

Lagarde stressed these risks could, in adverse circumstances, create feedback loops to sovereign balance sheets.

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