Lagarde warns mediocre growth could become the norm

The global economy's "new mediocre" phase of low growth risks becoming the "new reality" of the future as governments are doing too little to enact reforms even as risks to financial stability are rising, the head of the International Monetary Fund warned on Thursday.

Speaking ahead of next week's spring meetings of the IMF and World Bank, Christine Lagarde said the recovery from the 2008 financial crisis was continuing, with global growth last year of 3.4 per cent roughly in line with the average rate of the past three decades.

But the IMF managing director warned that the recovery remained "moderate and uneven" and that "in too many parts of the world it is not strong enough". Moreover, she said, "financial and geopolitical risks have increased".

"Six months ago, I warned about the risk of a 'new mediocre' - low growth for a long time. Today, we must prevent that new mediocre from becoming the 'new reality'," she said in prepared remarks for a speech at the Atlantic Council international affairs think-tank in Washington.

"The bottom line is that risks to global financial stability are rising. The 'new mediocre' growth environment is not a comfortable place with respect to financial stability."

Among those risks, she said, was a "structural decline in market liquidity" caused primarily by changes in the asset management industry in advanced economies that had created a mismatch in the maturity of assets and liabilities.

"This means that liquidity can evaporate quickly if everyone rushes for the exit at the same time - which could, for example, make for a bumpy ride when the Federal Reserve begins to raise short-term rates," she said.

Quoting both John F Kennedy's warning of the "long-range risks of comfortable inaction" and Winston Churchill's declaration that "I never worry about action, only inaction", Ms Lagarde said she was concerned too little was being done by governments to respond to the economic challenges.

Advanced economies "are doing slightly better than last year", she said, with the recovery firming up in the US and UK while prospects were improving in the eurozone thanks in part to the European Central Bank's monetary easing.

<

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

Some developing countries were doing better, with both India and Sub-Saharan Africa bright spots, and China, while slowing, was "growing more sustainably", she said. Brazil, Russia and many middle eastern economies beset by political turmoil, meanwhile, were struggling economically.

To respond, governments need to do more to support lagging demand, she said. Those actions ranged from more aggressive action to deal with an overhang of private debt and non-performing loans in the euro area that are hindering new lending, to removing energy subsidies weighing on budgets in oil-importing emerging and developing economies.

"Here is the big issue: while current growth is moderate, so too are medium-term prospects," Ms Lagarde said.

"In both advanced and emerging economies, potential growth is being pared down. This largely reflects lasting scars from the financial crisis, but also the undercurrents of changing demographics and lower productivity.

"To prevent the "new mediocre" from becoming the "new reality", structural reforms need to go hand-in-hand with macroeconomic and financial policies to raise confidence and generate investment."

But, she added, "frankly, in too many countries, these reforms have been lagging."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation