IMF Chief Predicts Modest Growth Next Year

30 Sep 2015 | Author: | No comments yet »

CNBC Exclusive: CNBC Transcript: CNBC’s Sara Eisen Speaks with IMF Managing Director Christine Lagarde on CNBC’s “Squawk Alley” Today.

A marked slowdown in big emerging market countries will cut global growth to its lowest level since the deep recession of 2009, the head of the International Monetary Fund has warned. Following is the unofficial transcript of a CNBC EXCLUSIVE interview with IMF Managing Director Christine Lagarde and CNBC’s Sara Eisen on CNBC’s “Squawk Alley” (M-F, 11AM-12PM ET) today. Christine Lagarde, the IMF’s managing director, said forecasts to be published by her organisation next week would show activity expanded by less than the 3.4% recorded in 2014 – the joint weakest since the world economy came to a standstill six years ago. Following are links to the interview on CNBC.com: http://video.cnbc.com/gallery/?video=3000427506 and http://video.cnbc.com/gallery/?video=3000427498.

The likelihood that the Federal Reserve will tighten monetary policy, coupled with China’s slowdown, “are contributing to uncertainty and higher market volatility” in the global economy, Lagarde said in a speech in Washington on Wednesday. Certainly, we are at a difficult and complex juncture,” she said, explaining that she is worried about recent global affairs — and international economics are similarly distressing. “On the economic front, there is also reason to be concerned. But China’s slowdown is rippling around the globe, feeding a fall in commodity prices and exacerbating decelerations in a host of other developing countries. Lagarde says potential growth is being held back by low productivity, aging populations and lingering problems from the 2008 financial crisis such as high debt levels. The fund’s World Economic Outlook, to be released Oct. 6, will confirm that the global growth rate is expected to be weaker this year than in 2014, she said.

Brazil’s central bank, for example, is now forecasting a much deeper recession as the country is hit by weak commodity prices, rising borrowing costs, political turmoil and capital outflows as investors pull out of Latin American markets. In July, the Washington-based IMF projected world growth of 3.3 percent this year, down from 3.4 percent in 2014, and accelerating to 3.8 percent next year. “We see global growth that is disappointing and uneven,” Lagarde said. “The ‘new mediocre’ of which I warned exactly a year ago — the risk of low growth for a long time — looms closer.” Fed Chair Janet Yellen said Sept. 24 that the central bank, which has held rates near zero since late 2008, was likely to begin tightening policy later this year if the economy stays on track. While the U.S. recovery is gathering steam and there are green shoots of growth in the eurozone and Japan, demand from advanced economies isn’t strong enough to pull emerging markets out of their funk. The IMF head warned that this sort of transition can create “spillover effects” in trade, exchange rates, asset markets and capital flows. “This will contribute to what could be a prolonged period of low commodity prices — a change that will need to be managed by policymakers, particularly in the large commodity exporters,” she said. Lagarde said she is concerned that many emerging markets may have expended their capacity to buffer against shocks in the wake of the financial crisis.

More broadly, most advanced economies should continue to keep monetary policy loose, while incorporating “spillover” risks into their decision making. The World Trade Organization announced that it had cut its forecasts for global goods trade earlier on Wednesday after quarterly growth turned negative, with trade shrinking by an average of 0.7 percent in the first two quarters of this year.

Emerging economies need to improve their monitoring of the foreign exchange exposures of major companies, while countries with room to raise public spending should try to boost growth by increasing investment, especially in infrastructure, she said. High debt, low investment, and weak banks continue to burden some advanced economies, especially in Europe; and many emerging economies continue to face adjustments after their post-crisis credit and investment boom.” Lagarde warned that the slowdown in China would have knock-on effects countries that rely heavily on Chinese demand for their raw materials. Lagarde didn’t repeat the fund’s call for the Fed to delay, but said the U.S. and other advanced-economy central banks needed a “crucial policy upgrade” in better accounting for the global implications of their actions. Advanced economies “should fully incorporate spillover risks in their decision-making process and, in addition, ensure that their communications are very clear in this regard,” the IMF chief said. WE DON’T SEE MUCH MOVEMENT ON THE INFLATION FRONT, NOR ON THE WAGES FRONT, SO WE ALSO ARE VERY INTERESTED TO SEE THAT THE INTERNATIONAL SCENE IS ALSO PERCEIVED AS LIKELY TO HAVE DOMESTIC EFFECTS AND MAY HAVE BEEN FACTORED INTO THE THINKING.

Growth in Latin America continues to “slow sharply.” In addition, reforms in China to lift incomes will lead to “slower, safer and more sustainable” growth, she said, adding that Chinese policymakers “are facing a delicate balancing act: they need to implement these difficult reforms while preserving demand and financial stability.” It would enhance the potency of monetary accommodation, improve the outlook, and bolster market confidence.” Policymakers in emerging economies should better monitor the foreign currency exposure of their major companies and ensure the resilience of their banks following a build-up in corporate leverage and foreign debt. “At the global level, there is a pressing need to complete and implement the regulatory reform agenda – with a special focus on improving the transparency and oversight of non-banks, or shadow banks.

And we still have another major upgrade ahead of us – the resolution framework for systemic, globally active financial institutions remains inadequate.” DOLLARS, FOR INSTANCE, ARE GOING TO, YOU KNOW, FEEL THE CONSEQUENCES OF THAT CHANGE OF INTEREST RATES GOING FORWARD, AND THERE WILL BE INCREASED VOLATILITY. IT’S ONE THING WHERE WE SAY TO THE POLICYMAKERS, THROUGH THE GOVERNMENTS OF THOSE COUNTRIES, WATCH OUT, LOOK INTO THAT, AND MAKE SURE THAT THERE IS – THERE ARE PRECAUTIONS TAKEN, AND YOU HAVE A SYSTEM IN PLACE, INCLUDING THE JUDICIAL, THE LEGAL SYSTEM, AND THE SAFETY NET THAT IS ARE IN PLACE TO ADDRESS THAT POTENTIAL RISK. A LOT OF INVESTORS HAVE BEEN TAKEN A BIT BY SURPRISE IN THE COURSE OF THE SUMMER BY WHAT THEY SAW, BUT THAT IS EXACTLY WHAT WAS EXPECTED, WHAT WE REGARD AS NECESSARY AND HEALTHY. LAGARDE: IF YOU LOOK AT THE EVOLUTION BOTH IN TERMS OF METAL PRICES, OIL PRICES, FOOD PRICES – LESS SO FOOD, BUT ON THE OTHER ONES, THERE’S A VERY STRONG CORRELATION BETWEEN THE GRADUAL SLOWDOWN OF CHINA AND THE – NOT JUST RECENT, BUT THE DECLINE OF COMMODITY PRICES OVER THE LAST FIVE YEARS.

SO IT’S, AGAIN, GOING TO BE WHERE IS THE IMPLEMENTATION, HOW QUICKLY, AND AS FAR AS THE IMF IS CONCERNED, WE ARE PREPARED TO ENGAGE, YOU KNOW, UNDER CERTAIN CONDITIONS. LAGARDE: WE ARE TALKING ABOUT DEBT RESTRUCTURING, WHICH IS NOT A CUT, BUT IT IS A RESTRUCTURING – MATURITY, INTEREST RATES, THAT SERVICE FRANCHISE FOR A PERIOD OF TIME. WE’RE FACING ANOTHER LOOMING SHUTDOWN DEADLINE IN THE NEXT 12 HOURS AND POTENTIAL DEBT CEILING ONE COME NEXT FALL LATER IN THE FALL OR EVEN IN THE WINTER. AND I’M JUST WONDERING WHETHER ECONOMIC KEY PLAYERS ARE NOT GETTING USED TO IT, WHICH WOULD BE A PITY BECAUSE I THINK, YOU KNOW, POLICYMAKERS ARE PLAYING A ROLE IN BUILDING CONFIDENCE, REMOVING UNCERTAINTY, GIVING PREDICTABILITY TO A SYSTEM.

WHEN WE SEE AN ECONOMY THAT IS, YOU KNOW, AT THE MOMENT, LEADING THE GLOBAL CHARGE BY HAVING A REASONABLY GOOD GROWTH, IT’S A PITY NOT TO LEVERAGE THAT. LAGARDE: WELL, OVER THE NEXT WEEK, ACTUALLY, BECAUSE THE 188 MEMBERS WILL BE MEETING IN LIMA, PERU FOR THE FIRST TIME IN THE LAST 50 YEARS, AND I HOPE THAT THEY CALL US AROUND THE NECESSITY OF AN UPGRADE OF THEIR POLICIES. I THINK MANY OF THEM ARE DOING SOME RIGHT THINGS, BUT IT NEEDS TO BE UPGRADED IN VIEW OF THE URGENCY AND IN VIEW OF THE SIZE OF CHALLENGES THAT WE ARE FACING. With CNBC in the U.S., CNBC in Asia Pacific, CNBC in Europe, Middle East and Africa, CNBC World and CNBC HD , CNBC is the recognized world leader in business news and provides real-time financial market coverage and business information to approximately 371 million homes worldwide, including more than 100 million households in the United States and Canada. CNBC at night features a mix of new reality programming, CNBC’s highly successful series produced exclusively for CNBC and a number of distinctive in-house documentaries.

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