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Lagarde warns global growth prospects have weakened

Calcutta News
31 Dec 2015, 06:57 GMT+10

BERLIN - World economic recovery weighed down by rising US interest rate, a slowdown in Chinese economy and global trade, will continue to disappoint next year, head of the International Monetary Fund (IMF) has warned in an article published on Wednesday in German newspaper Handelsblatt.

The outlook for the medium-term has also deteriorated, wrote IMF managing director Christine Lagarde, pointing to the decline in raw material and energy prices, which is posing problems for economies dependent on them.

"All of that means global growth will be disappointing and uneven in 2016," Lagarde said.

In October the IMF forecast that the world economy would grow by 3.6 percent in 2016.

But Lagarde warned that the mid-term prospects had also weakened as low productivity, ageing populations and the effects of the global financial crisis has dampened growth.

The IMF's managing director wrote that the start of a normalisation of US 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.

Lagarde cautioned that the first interest rate hike by the US Fed Reserve in nine years would also have "spillover" effects as it could lead to tighter credit conditions and higher debt servicing costs for emerging markets.

While developing countries were generally better prepared for higher interest rates than previously, Lagarde was concerned about their ability to absorb shocks.

She said emerging markets needed to improve monitoring of the foreign exchange risks, which could be triggered by tighter monetary policy, and could adversely impact their big companies.

"I'm worried about their (developing economies) ability to absorb shocks", Lagarde cautioned.

"A lot of countries have taken on more debt, much of which is denominated in US dollars," she argued.

"Rising interest rates and a stronger dollar could push companies into insolvency, and banks and governments could become infected," she warned.

The IMF has calculated that emerging market companies have "over-borrowed" by $3 trillion in the last decade, reflecting a quadrupling of private sector debt between 2004 and 2014.

The risks associated with these changes could be overcome by supporting demand, maintaining financial stability and reforming structures, IMF chief contended.

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