WASHINGTON (Reuters) - The global economy could be stuck on a ‘new mediocre’ growth path with high debt and unemployment unless policymakers open up labor markets, invest in infrastructure and reform fiscal policies, the head of the International Monetary Fund warned on Thursday.
Speaking after European Central Bank President Mario Draghi announced a plan to buy bundled debt in order to boost Europe’s flagging economy, Christine Lagarde said the euro zone in particular risks sinking into a morass of low growth as it grapples with high unemployment and low inflation.
The United States is a rare bright spot, though its recovery from the 2007-09 recession is its slowest since World War Two. Japan’s “Abenomics” is also struggling after second-quarter GDP in the world’s third largest economy shrank by an annualized 7.1 percent, showing the mounting risks to the global economy ahead of the fund’s fall meetings next week.
Lagarde called for bold policies and a “new momentum” to bolster flagging growth six years after the global financial crisis erupted.
The IMF is likely to downgrade its global economic forecasts, set to be released next week, from the 3.4 percent growth rate for 2014 it expected in July, and the 4 percent rate forecast for 2015.
“Our main job now is to help the global economy shift gears and overcome what has been so far a disappointing recovery: one that is brittle, uneven and beset by risk,” Lagarde said.
Lagarde has been beating the drum on deeper economic reforms for at least the past two years although efforts to secure tangible action in the euro zone have been stymied by Germany’s reluctance to embrace stimulus.
The euro zone is likely to emerge as the main area of economic concern at the fund’s meetings, after a gathering of the Group of 20 top economies last month again failed to secure agreement on concrete measures, largely due to resistance from Germany, Europe’s dominant political and industrial force.
Lagarde also warned of rising geopolitical risks due to the Ebola crisis, Ukraine, the Middle East, and parts of Asia, as well as financial risks, as central banks in the United States and Britain prepare to exit their money-printing regimes while Europe and Japan continue their stimulus programs.
She also said there was a risk financial market bubbles could emerge as a result of the money pumped into the financial system by the world’s central banks, which have sent asset prices higher while economies remain weak.
The U.S. Federal Reserve alone has more than quadrupled its balance sheet to $4.4 trillion through three massive bond-buying programs.
The U.S. economy’s outperformance has pushed the U.S. dollar sharply higher, and economists say any monetary tightening by the Federal Reserve could hit growth prospects in Latin America, while the rise of the dollar against the Japanese yen could hurt prospects in emerging Asia.
The dollar index, which measures the U.S. greenback against six major currencies, surged nearly 8 percent in the third quarter, its strongest quarterly performance in six years.
Lagarde called on policymakers to do more to boost economic growth and create jobs, including reforming labor market policies and energy subsidies, combating tax evasion and opening up professions like law and taxi driving to competition.
“It means a mix of bolder policies to inject a ‘new momentum’ that can overcome this ‘new mediocre’ that clouds the future,” she said.
Reporting by Anna Yukhananov; Editing by Chizu Nomiyama, Leslie Adler, David Chance and Andrew Hay