IMF Head: Expect Stunted Global Growth in 2016

Global economic growth will be “disappointing” next year, the head of the International Monetary Fund opined in a guest article in the Wednesday edition of the German newspaper Handelsblatt.

IMF Managing Director Christine Lagarde said the prospect of rising interest rates in the United States and an economic slowdown in China were contributing to uncertainty and a higher risk of economic vulnerability worldwide. She said the start of normalization of U.S. monetary policy and China’s shift towards consumption-led growth were “necessary and healthy” changes but needed to be carried out as efficiently and smoothly as possible.

The U.S. Federal Reserve hiked interest rates for the first time in nearly a decade earlier this month and made it clear that this was a tentative beginning to a “gradual” tightening process.

Lagarde maintains that there are “potential spillover effects,” with the prospect of increasing interest rates there already having contributed to higher financing costs for some borrowers, including in emerging and developing markets. She added that although countries with highly developed economies are generally better prepared for higher interest rates than they had been in the past, she was concerned about the ability of the US to absorb the shocks. “Most highly developed economies, except the USA and possibly Britain, will continue to need loose monetary policy, but all countries in this category should comprehensively factor spillover effects into their decision-making.”

Lagarde warned that rising U.S. interest rates and a stronger dollar could lead to firms defaulting on their payments and that this could then “infect” banks and states.

Beyond that, she noted that growth in global trade has slowed considerably and a decline in raw material prices is posing problems for economies based on those commodities. At the same time, the financial sector in many countries still has weaknesses, and financial risks are rising in emerging markets. “All of that means global growth will be disappointing and uneven in 2016,” Lagarde predicted, adding that low productivity, aging populations, and the effects of the global financial crisis were putting the brakes on growth.