Softness in global economy to extend into 2016 as developing world drags: IMF

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.

WASHINGTON — A relentless deceleration in the economies of the developing world will cause global growth to slow this year and only pick up a bit more pace in 2016, the head of the International Monetary Fund (IMF) said on Wednesday.The IMF voiced concern today about the global economy, weakened by China’s slowdown and facing a potential “vicious cycle” from a looming US interest rate hike. “On the economic front, there is … reason to be concerned.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. But her comments appeared to be more pessimistic than the global lender’s forecast made in July, just before global financial markets erupted into turmoil over concerns that China’s economy could crash.

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. Lagarde also pointed to the “sharp deceleration” in the growth of global trade and the “rapid drop” in commodity prices, which is hammering the finances of commodity-exporting emerging market economies. Many of the recent economic gains in Asia, Latin America and Asia “now seem in jeopardy,” said Lagarde, addressing the Council of the Americas ahead of next week’s IMF and World Bank annual meetings to be held in Lima, Peru. Lagarde said 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. She urged emerging markets to diversify their economies and said some of them might be ill prepared to weather the financial storm that could arise when the US Federal Reserve eventually raises interest rates. She said it will be critical to properly manage the transition in China to consumer-led growth and the pending move by the Federal Reserve to higher interest rates. 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. Policy makers in emerging markets should keep a closer eye on company debts denominated in dollars as well as to the banks that lent to them, she said.

The IMF said on Tuesday emerging market firms have racked up debts of $18-trillion and rate hikes in the developed world could spur a rash of corporate bankruptcies. The rate rise, still on the Fed’s track for this year, could drive investors to pull funds from emerging countries into the United States and further strengthen the strong dollar, the currency on which the debt of many companies is based. “Rising US interest rates and a stronger dollar could reveal currency mismatches, leading to corporate defaults — and a vicious cycle between corporates, banks, and sovereigns,” Lagarde said.

More broadly, most advanced economies should continue to keep monetary policy loose, while incorporating “spillover” risks into their decision making. 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 on countries that rely heavily on Chinese demand for their raw materials. 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. 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.” She did not repeat her previous comment that the Fed should wait until 2016 to raise rates, but she underscored the importance of being certain of the decision. 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.

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. 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.

These include CNBC.com, the online destination for global business; CNBC PRO, the premium, integrated desktop/mobile service that provides real-time global market data and live access to CNBC global programming; and a suite of CNBC Mobile products including the CNBC Real-Time iPhone and iPad Apps. Members of the media can receive more information about CNBC and its programming on the NBC Universal Media Village Web site at http://www.nbcumv.com/mediavillage/networks/cnbc/.

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