Despite continuing risks to the global recovery, especially high unemployment, the world’s major economies are beginning to gain momentum and policymakers seem to be on the right track, IMF Managing Director Christine Lagarde said Tuesday, but she again warned that emerging markets have seen some vulnerabilities exposed by the volatility of capital flows.
“While unemployment is too high, public and private debt are too high, and global growth is too low relative to potential, we certainly see some economic momentum in the works – global economic growth of 3-3/4 percent this year, rising to 4 percent next year,” Lagarde said in a speech prepared for Stanford University.
Speaking after the weekend meeting of the Group of 20 finance ministers and central bankers in Australia, she said she left the gathering “with a sense that, despite many risks that could undermine the recovery, policy makers are broadly on the right track.”
However, she repeated he caution on the need for emerging market economies in particular to ensure they have credible policies in place and pursue needed structural reforms.
“Ironically, the emerging markets that kept the global economy afloat during the crisis … are weakening, with their economic cycles turning and growth slowing,” she said. “For some of them, a rising tide came with more choppy waves – strong growth opened up vulnerabilities that came into focus as growth began to slow.
“At the same time, because the economic situation was improving in the U.S., the U.S. Federal Reserve started the process of dialing back its unconventional monetary policy. This mix created the conditions for some capital to flow out of a number of emerging markets, thus generating market volatility and currency variations,” Lagarde said.
She again highlighted the need for communication amongst policymakers and continued accommodative monetary policy in advanced economies.
Her speech also focused on the challenges to the global economy from rapidly changing technology, and the potential impact on workers and income inequality.
While acknowledging the difficulty in designing policies to address inequality, Lagarde nevertheless emphasized the importance of the effort “Because if not managed carefully, rising inequality and economic exclusion can have pernicious effects. It can undermine economic, social – and perhaps even political – stability.”
And she said IMF research shows “that a severely skewed income distribution harms the pace and sustainability of growth over the longer term.”
“In the years ahead, it will no longer be enough to look simply at economic growth. We will need to ask if this growth is inclusive – whether the small boats rise with the big boats instead of being capsized by them,” she said.